Oil giant Shell and Thai rival PTT could be heading into the first formal takeover auction for a listed British company since 2008 as they battle for Cove Energy and its stakes in huge new east African gas finds.
Britain's takeover watchdog ruled yesterday that if neither suitor declared its current offer final before 1600 GMT on Monday, an auction would start the next day, which could see them submit bids to daily deadlines until a winner is found.
The ball is in Shell's court after its $1.8 billion, or 220 pence a share, bid for Cove was trumped by a $1.9 billion, or 240 pence a share, offer from Thailand's PTT Exploration and Production in May.
Investors are betting the Anglo-Dutch group will raise its bid before a deadline at 1600 GMT on Tuesday, and believe it has the firepower to win the five-month battle.
East Africa is set to become one of the world's largest gas exporters, supplying energy-hungry Asia with liquefied natural gas (LNG), a gas market in which Shell is one of the world's biggest and most experienced players.
"Both Shell and PTT really need Cove very badly. But Shell has more firepower than PTT, which is quite leveraged and has less means than Shell. We think there's a good chance (Shell comes back with a higher offer)," said Anne-Sophie D'Andlau, co-founder of Paris-based hedge fund firm CIAM and a small shareholder in Cove.
The battle has encouraged investors to expect a higher offer, with shares in Cove for the last month consistently trading between 10 and 15 percent higher than PTT's 240 pence per share bid.
At 1130 GMT, Cove shares were up 0.6 percent at 275.5 pence, valuing the firm at about 1.3 billion pounds ($2 billion).
However, some analysts sounded a note of caution, saying that while Shell would be keen to gain a foothold in gas fields off the coast of East Africa, Cove was not its only option.
If Shell and PTT don't submit revised offers on Tuesday, their current bids will be regarded as final and there will be no auction.
"The key thing here is to remember the big picture. Shell will be looking at this from multiple points of entry. They won't just be thinking about getting into this area from the point of view of Cove alone," Oriel Securities analyst Richard Griffith said.
Another analyst who declined to be named noted that the increase in Cove's gas reserves from discoveries made since Shell made its offer meant that a higher bid was possible.
"If Shell want to make an argument, they can get to 260 pence without breaking sweat. Is Cove the only option? No, but it is an option," the analyst said.
Cove owns an 8.5 percent stake in a Mozambique license containing some of the big gas discoveries, while US explorer Anadarko has a 36.5 percent stake in the license, meaning Shell could turn its attention to a deal with Anadarko should it decide against the Cove deal.
Other points of entry to East Africa for Shell could include tie-ups with Italy's ENI, which has also found gas in Mozambique, or BG Group and ExxonMobil, which have discoveries off the coast of Tanzania.
PTT is seen by analysts as not having as many options as Shell to access East Africa's gas reserves.
"The financial firepower Shell can bring in terms of LNG project development should not be under-estimated relative to other company's abilities to borrow money to build LNG plants," Oriel's Griffith said.
Building LNG facilities requires multi-billion dollar investments, meaning that Shell could be seen as a more attractive partner than PTT by other companies with gas discoveries in the region.
Shareholders have until 1200 GMT yesterday to accept PTT's offer, but few are likely to do so given the level at which Cove's shares are trading and analysts are expecting the Thai firm to extend its offer as it waits to see Shell's next move.
US manufacturer Manitowoc won the last takeover battle of a listed British company to go into an auction process, when it beat U.S. rival Illinois Tool Works to buy British kitchen equipment maker Enodis in 2008.