Clough to invest $98m in Forge

Clough's push to become a major player in the oil and gas services sector has ramped up after it announced today it was set to take a controlling stake in Forge Group for up to $98 million.

Perth-based Clough said today it also will form a strategic alliance with engineering and construction company Forge that will allow both companies to leverage complementary services in the oil and gas, mining and civil infrastructure sectors.

Under the deal, Clough will invest $19.5 million in Forge through a share placement of 10.25 million shares at a discounted $1.90 each.

Shares in Forge shed 19 cents to $2.12 at 14:32 AEDT.

Clough then intends to make a proportional takeover of $2.10 per share to Forge shareholders for 50 per cent of their shares in Forge.

Forge directors and certain shareholders holding a 41.9 per cent interest in Forge say they intend to vote in favour of the placement and accept the takeover offer, giving Clough a 31 per cent interest in Forge.

Clough has the potential to acquire up to 56.5 per cent shareholding in Forge, depending on the offer acceptance level from other shareholders.

The full statement is below:

The Boards of Clough Limited ("Clough", ASX: CLO) and Forge Group Limited ("Forge", ASX: FGE) are pleased to announce the intention to create a new Strategic Alliance to jointly target project opportunities in the LNG / oil and gas sectors and to support Forge's anticipated continued growth.

The Strategic Alliance will be underpinned by Clough becoming a cornerstone shareholder in Forge, creating an alignment of interests that aims to generate substantial benefits for both companies in FY11 and beyond through a material, positive impact on their earnings.

The Strategic Alliance and cornerstone shareholding will be facilitated through a series of transactions for a potential maximum investment by Clough of approximately $98 million.

The Strategic Alliance will formally be triggered in various circumstances, including when Clough's interest in Forge reaches 31% or the Offer is declared unconditional by Clough.

Clough and Forge believe the Strategic Alliance will allow both companies to leverage their complementary expertise and to capitalise on significant growth opportunities in the oil and gas, mining and civil infrastructure sectors. Key target markets are Australasia and West Africa.

This provides compelling logic for the transactions, immediately and in the long term. The Placement has the unanimous support of the Forge Board of Directors and is recommended by them to Forge shareholders, in the absence of a superior proposal.

It also has the support of several major shareholders of Forge who have entered into agreements with Clough to facilitate the transaction. Upon completion of the Placement, Clough intends to nominate John Smith, Chief Executive Officer of Clough, to the Board of Forge, adding substantial experience and capability to the Forge Board.

The appointment will take effect following completion of the Offer.
In addition, a new Independent Non‐Executive Chairman will be appointed to the Board in due course.

Transaction Rationale, Strategic Alliance Agreement and Benefits
The proposed transactions provide both companies with access to growth and operational benefits that the companies believe would not otherwise be available if they continued to operate in isolation.

As reported to the market in August 2009, Forge has been seeking a major strategic partner to provide corporate and operational capability to support and accelerate its next phase of growth.
The transaction with Clough meets Forge's objectives to strengthen its balance sheet to pursue growth and acquisition opportunities while allowing Forge to retain a multi‐market focus.

For Clough, the transaction provides complementary construction capabilities to its existing engineering‐led EPC service offering.

The Strategic Alliance Agreement provides an operational framework to deliver the expected benefits and facilitate long‐term strategic co‐operation between the companies. In practice, this includes:

- immediate access for Forge, on a commercial basis, to Clough's proven project management, resources and control systems to accelerate and support Forge's individual growth strategy;

- identification of mutually advantageous partnering opportunities while continuing to act independently in the provision of services in the markets in which they operate;

- Forge becoming Clough's partner of choice in construction activities that align with Forge's capability and capacity; and

- Clough assisting Forge to identify and assess acquisition opportunities which complement Forge's strategic growth plan.

All of Forge's management team is being retained and augmented in co‐operation with Clough. In addition, it is anticipated that a senior Clough executive will join Forge's executive management team.

Complementary Growth Opportunities

Clough Chief Executive Officer John Smith said Clough was excited by the opportunities presented by the new Strategic Alliance.

"The potential of this win‐win relationship will accelerate the opportunities for both parties, individually and in partnership, to participate in future project spend," said Mr Smith.

"Forge has demonstrated its ability to deliver both operationally and financially and its proven engineering and construction capabilities are complementary to our own capabilities.

"We believe we have here a unique blend of skills and expertise, sitting on top of an unprecedented time and place opportunity.

"Clough's focus will remain on oil and gas. On a case by case basis Clough and Forge will work together to provide clients a greatly enhanced Engineering, Procurement and Construction ("EPC") capability and capacity relative to the oil and gas market, in particular for domestic, conventional LNG and coal seam gas projects."

Forge Managing Director Peter Hutchinson said the Clough proposal represented an outstanding opportunity for Forge to capture additional value from the current market activity.

"Forge has grown substantially in the two and a half years since listing on the ASX and the time is right to partner with a major contractor to take our business to the next level.

"We have performed very strongly to date and recognised last year that we needed the support of an experienced major contractor to effectively build revenue and earnings in the immediate and longer term.

"We have considered a number of alternatives and believe that Clough is the best fit for the Forge business.

"Clough is a highly respected engineering led EPC contractor both locally and internationally with a strong oil and gas engineering focus and proven expertise which exactly fit our stated requirements.

"We are pleased that the Board of Forge is able to recommend a series of transactions with Clough that significantly strengthens our balance sheet in the short term, but which will also deliver long term value for shareholders through a large strategic partner.

"Under the terms of the proposed Offer, all Forge shareholders will have opportunity to sell 50% of their holding in Forge to Clough should they wish to do so. Equally, our shareholders have the choice not to accept the Offer and to retain their shareholding in Forge."

Key Transaction Terms

- Clough to subscribe for approximately 10.25m Forge shares at $1.90 per share (for approximately $19.5m), subject to Forge shareholder approval.
- Subject to shareholder approval and completion of the Placement, Clough intends to make a proportional cash takeover offer at $2.10 per share to all existing Forge shareholders for 50% of their shares in Forge.

- The Forge Directors4 and certain Forge shareholders ("Major Shareholders") holding approximately 41.9% of the issued shares of Forge intend to vote in favour of the Placement and accept the Offer in the absence of a superior proposal. If the Placement is approved and the Forge Directors and Major Shareholders accept into the Offer (and it becomes unconditional), Clough will acquire a total interest of 31% in Forge.

- Clough and Forge have entered into a Strategic Alliance Agreement that provides a foundation for long‐term strategic co‐operation. This includes Clough providing Forge with access to its resources, processes and systems through a services agreement. The key alliance principles under the agreement become effective on certain triggers, including Clough obtaining 31% of Forge or the Offer being declared unconditional.

- Clough has also agreed to offer to acquire 50% of all unlisted options held by Forge Option Holders at $1.75 per option (being the same price as the Offer less the option exercise price). The Executive Directors, Messrs Peter Hutchinson and Andrew Ellison, have agreed to sell 50% of their options (totalling 3 million options) with settlement of this acquisition subject to the Offer being declared unconditional.

- Clough has entered into call option agreements with the Major Shareholders in respect of 19.99% of the issued shares of Forge at a price of $2.10 per share. If the Placement is approved and completed, the agreements automatically reduce to approximately 6.96% of Forge's issued shares.

- The proposed Offer will be made to all Forge shareholders so that they all have equal opportunity to sell 50% of their holdings in Forge should they wish to do so.

- Forge Directors have stated their intention to accept the Offer in relation to the shares they hold and intend to recommend shareholders accept the Offer in the absence of a superior offer and subject to an independent expert concluding the Offer is reasonable.

- If the pre‐conditions to making the Offer are satisfied, the Offer itself will be subject to certain conditions being fulfilled ("Conditions") which are set out in Appendix A, including third party consents from existing clients of Forge where required and a minimum acceptance condition of 31% of the issued shares in Forge.

Forge Director Recommendations

The Forge Directors are very supportive of the proposed transactions with Clough. In addition to the strategic benefits, Forge shareholders are able to retain some or all of their holdings in Forge at their discretion and share in the future upside and growth of Forge going forward. The Forge Directors believe this upside is significantly more likely to be realised through the proposed transactions with Clough than without this partnership.

The Forge Directors unanimously recommend Forge shareholders vote in favour of the Placement in the absence of a superior proposal. Forge Directors also unanimously recommend Forge shareholders accept the Offer in the absence of a superior proposal and subject to the independent expert concluding the Offer is reasonable.

Shareholder Support

The Major Shareholders holding 41.9% in aggregate of the issued capital of Forge intend to vote in favour of the Placement and to accept into the Offer in the absence of a superior proposal. Clough has entered into call option agreements with certain Forge shareholders in respect of 19.99% of the issued shares of Forge at a price of $2.10 per share.

Shareholder Documentation and Indicative Timetable

Forge will send to shareholders a Notice of Meeting with an Explanatory Statement providing comprehensive information in relation to the proposed Placement, including the reasons for the Directors' recommendations and the benefits to Forge and its shareholders. The meeting is expected to be held on or about 6 April 2010.

If the Placement is approved by Forge shareholders, Clough's Bidder's Statement and Forge's
Target's Statement will be sent to all Forge shareholders. The Target's Statement will include Forge Directors' recommendations and an Independent Expert's Report so that shareholders are fully informed when making a decision as to whether to accept the Offer.

The indicative timetable for the implementation of the above transactions is set out below. Note the approval of the Placement is a pre‐condition to the Offer proceeding. This is not a legal requirement and Clough reserves its right to waive this condition.