Disposal of Italian Portfolio

RNS Number : 4617C

Sound Energy PLC

22 January 2018

Sound Energy PLC

("Sound Energy" or the "Company")

Disposal of Italian Portfolio

Sound Energy, the African and European focused upstream gas company, is pleased to announce that it has entered into a binding conditional sale and purchase agreement (the "Binding Agreement") with Saffron Energy Plc ("Saffron") under which it is proposed that Saffron acquires Sound Energy's portfolio of Italian interests and permits through the acquisition by Saffron of the entire issued share capital of the Company's wholly owned subsidiary, Sound Energy Holdings Italy Limited ("SEHIL"). SEHIL holds all of Sound Energy's Italian oil and gas interests through its own wholly owned subsidiary, Apennine Energy SpA ("APN"). It is proposed that Saffron will be renamed Coro Energy plc.

The Binding Agreement constitutes the first part of the transaction envisaged by the heads of terms announced on 5 October 2017 (the "Heads of Terms") and the acquisition of SEHIL by Saffron will result in the combination of the Italian oil and gas portfolios of Sound Energy and Saffron (the "Proposed Transaction").

The Binding Agreement is conditional on, inter alia, completion of a firm and conditional placing by Saffron (which will be subject to shareholder approval) to raise funds for working capital, the approval of shareholders of Saffron and re-admission of the entire issued, and to be issued, share capital of Saffron to trading on the AIM market of the London Stock Exchange plc ("AIM"), as well as the approval by Sound shareholders of the Sound Capital Reduction (as defined below). It is currently expected that these conditions will be satisfied by the end of April 2018.

Under the Binding Agreement, and subject to Saffron shareholders approving the issue of new shares by Saffron, the consideration for the disposal of SEHIL will be fully satisfied through the issue of 185,907,500 new ordinary shares of £0.001 each in the capital of Saffron (the "Consideration Shares"), subject to any rounding of fractional entitlements.

The Consideration Shares are intended to be issued by Saffron directly to Sound Energy's shareholders, pro rata to their holdings of Sound Energy shares on a record date (the "Repayment Record Date") expected to be set as 26 March 2018, with Saffron being bound to issue the Consideration Shares pursuant to the terms of a deed poll (the "Deed Poll") to all Sound Energy shareholders on the record at the Repayment Record Date (the "Repayment Record Date Shareholders"). Because the issuance of the Consideration Shares to Sound Energy shareholders in consideration for the transfer by the Company of the shares in SEHIL to Saffron will constitute an indirect capital repayment by Sound to its shareholders, Sound Energy will propose a capital reduction (the "Sound Capital Reduction"). The issuance of the Saffron shares directly to Sound Energy's shareholders will not be possible unless the Sound Capital Reduction receives Sound Energy shareholder approval of the same, at a general meeting to be convened on 8 February 2018. A circular to Sound Energy shareholders convening the general meeting and containing details of the Binding Agreement and the proposed Capital Reduction will be posted in the coming days.

Under the terms of the Binding Agreement, Sound Energy will retain: (i) its economic rights to receive the proceeds of any future sale of the land comprising the Badile permit and situated in the Piedmont Lombard Basin in northern Italy owned by SEHIL (the "Badile Land"), which had an unaudited carrying value of £1.6 million as at 30 June 2017; and (ii) the benefit of expected SEHIL Italian VAT receivables totalling €4.0 million linked to Badile drilling costs (the "VAT"). Under the Proposed Transaction, Saffron has undertaken to remit the net proceeds of the Badile Land sale and the VAT to Sound Energy on receipt by SEHIL.

Furthermore Saffron has agreed to grant Sound an overriding royalty of 5% on all revenue that may be derived from any wells drilled on the exploration license D.R.74 AP, colloquially referred to as 'Laura'.

As at 30 June 2017 APN had unaudited total assets of £11.0 million inclusive of the Badile Land and the VAT. APN generated revenues of £0.8 million and a loss before tax of £4.9 million in the year ended 31 December 2016 and unaudited revenues of £0.4 million and an unaudited loss before tax of £14.5 million in the six months ended 30 June 2017.

A more detailed summary of the terms of the Binding Agreement is set out below.

Under the Proposed Transaction, subject to Saffron Energy shareholder approval, Saffron will issue each of James Parsons and Marco Fumagalli (both Sound Energy directors), in their capacities as directors of Saffron, with options to subscribe for 10 million new ordinary shares in the capital of Saffron (the "Ordinary Shares") at a price of 4.38p per new Ordinary Share (the "Option Grant"). Sara Edmonson and Fiona MacAulay (both directors of Saffron) will receive options on the same terms and in the same amount, and David Garland, in his capacity as director of Saffron, will receive options to subscribe for 2 million new Ordinary Shares on the same terms.

Related Party Transaction

James Parsons and Marco Fumagalli are directors of both Sound Energy and Saffron. Under the AIM Rules for Companies ("AIM Rules"), James Parsons and Marco Fumagalli are, therefore, deemed to be related parties of the Company and the Proposed Transaction, as a result of the Option Grant, is a related party transaction pursuant to Rule 13 of the AIM Rules. The independent directors of Sound Energy, Stephen Whyte, Brian Mitchener and Richard Liddell, consider, having consulted with the Company's nominated adviser, that the terms of the Proposed Transaction are fair and reasonable insofar as the shareholders of Sound Energy are concerned.

Saffron acquisition of Po Valley Operations Limited

The Company understands that Saffron has entered into an acquisition agreement with ASX listed Po Valley Energy Limited ("Po Valley"), pursuant to which Saffron will acquire the entire issued share capital of Po Valley Operations Limited ("PVO"), thereby acquiring Po Valley's portfolio of Italian interests and permits. Po Valley is currently interested in 53.8 per cent of Saffron's issued ordinary share capital and the consideration payable by Saffron for its acquisition of PVO will be the issuance of 200,000,000 new ordinary shares in Saffron.

Suspension of Saffron Ordinary Shares

By virtue of the size of the transactions being undertaken by Saffron Energy, these are being treated as a reverse takeover of Saffron under Rule 14 of the AIM Rules for Companies, and will require Saffron shareholder approval and the publication of a Saffron AIM admission document. Documents to convene a general meeting of Saffron shareholders are currently under preparation, and it is expected that such Saffron general meeting will be held in February 2018. Accordingly, the Ordinary Shares will remain suspended from trading on AIM, pending publication of an AIM admission document by Saffron.

The Consideration Shares will not be issued to Sound shareholders unless and until the Ordinary Shares have been re-admitted to trading on AIM (by which time Saffron will have been re-named Coro Energy plc).

Summary of Binding Agreement

(a) the consideration payable by Saffron for the entire issued share capital of SEHIL is the issue of the Consideration Shares upon completion of the Binding Agreement ("Completion") to Sound Energy shareholders;

(b) the Binding Agreement is conditional on certain conditions having been satisfied or waived on or prior to Completion of the Sound Capital Reduction, including the following:

(i) completion of a firm and conditional placing of new Saffron shares to raise funds for working capital;

(ii) Saffron shareholder approval;

(iii) Sound Energy shareholder approval of the Sound Capital Reduction;

(iv) Court approval of the Sound Capital Reduction; and

(v) receipt of required regulatory approvals;

(i) by Sound Energy, in the event of a Saffron material adverse change (meaning any event, matter, change or condition which occurs, or is announced, or becomes known to Saffron (whether or not becoming public) where that event, change or condition causes, or could reasonably be expected to cause, a reduction in the consolidated net assets of Saffron and its subsidiaries of more than £200,000, excluding certain global events);

(ii) by Sound Energy at any time before 8.00 am on the second court date relating to the Sound Capital Reduction (the "Second Court Date") if any Saffron director or the board of directors of Saffron, excluding any Saffron directors excluded from recommending and voting thereon, publicly changes (including by attaching qualifications to) or withdraws (including by abstaining) their statement that they consider the Proposed Transaction and/or readmission of Saffron's shares to trading on AIM to be in the best interests of the Saffron shareholders or their recommendation that the Saffron shareholders approve the Proposed Transaction and/or readmission, or publicly states an intention to change their voting intention in respect of any Ordinary Shares held by them;

(iii) by Saffron, in the event of a SEHIL material adverse change (meaning any event, matter, change or condition which occurs, or is announced, or becomes known to Sound Energy (whether or not becoming public) where that event, change or condition causes, or could reasonably be expected to cause, a reduction in the consolidated net assets of SEHIL and its subsidiaries of more than £200,000, excluding certain global events) (a "SEHIL Material Adverse Change");

(iv) by Saffron at any time before 8.00 am on the Second Court Date if any Sound Energy Director or the board of directors of Sound Energy, excluding any Sound Energy directors excluded from recommending and voting thereon, publicly changes (including by attaching qualifications to) or withdraws (including by abstaining) their statement that they consider the Sound Capital Reduction and/or the Proposed Transaction to be in the best interests of the Sound Energy shareholders or their recommendation that the Sound Energy shareholders approve the Sound Capital Reduction, or publicly states an intention to change their voting intention in respect of any Sound Energy shares held by them; and

(v) by Saffron, in the event that Sound Energy makes any disclosure against the Sound Energy warranties prior to Completion which causes or constitutes or is reasonably likely to cause or constitute a SEHIL Material Adverse Change;

(d) Sound Energy will give various warranties to Saffron concerning (among other things) its capacity to enter into the Binding Agreement and related documents, the share capital, business and assets of SEHIL and its subsidiary, APN, litigation and tax;

(e) Saffron will be required to give certain warranties to Sound Energy, for the benefit of the Sound Energy shareholders, concerning (amongst other things) its capacity to enter into the Binding Agreement and related documents, its share capital, litigation and tax;

(f) Sound Energy agrees to provide a restoration payment to Saffron (or SEHIL or APN, as Saffron may direct) in respect of Badile in a total aggregate amount of EUR 870,000 to cover costs with respect to the site restoration of Badile (payments to made on a quarterly basis in instalments on the basis of estimates submitted by Saffron to Sound Energy). If, at the end of the Badile site restoration process, Saffron has not received the full EUR 870,000, Sound Energy agrees to make a balancing payment (the "Badile Site Restoration Payments");

(g) in addition to providing the Badile Site Restoration Payments, Sound Energy also agrees to indemnify Saffron, SEHIL and/or APN from and against any costs relating to the Badile site restoration which are incurred by Saffron, SEHIL and/or APN above and beyond the Badile Site Restoration Payments which directly result from:

(i) the requirement of any regulatory authority (whether or not pursuant to applicable laws or regulations);

(ii) changes in any applicable laws or regulations following the date of the Binding Agreement;

(iii) changes following the date of the Binding Agreement in either:

(A) environmental laws applicable to the restoration of Badile; and/or

(B) the specific restoration requirements for Badile imposed by the relevant regulatory authority on Saffron, SEHIL and/or APN (whether or not pursuant to applicable laws or regulations);

(iv) any bid or tender for works comprised or forming part of the Badile site restoration costs expiring as a result of delays in receipt of approvals from any regulatory authority (whether or not pursuant to applicable laws or regulations) and any new or revised bid or tender for such works being for an increased cost; or

(v) a dispute regarding unpaid rent and unlawful occupation of land relating to the Badile Land;

(h) in addition to the above, Sound Energy provides certain indemnities in the Binding Agreement to Saffron in respect of specific identified liabilities, including in respect of certain SEHIL/APN employees, expired search permits, plants in decommissioning, surface fees, unauthorised drilling and Sound shareholders receiving Consideration Shares in breach of applicable laws or regulations. Sound Energy will also give a reasonably standard form tax covenant (the "SEHIL Tax Covenant");

(i) under the Binding Agreement, no warranty claim can be brought unless it is for an amount at least equal to £20,000, and until the party bringing the claim has a claim or basket of claims exceeding £200,000; and

(j) the liability of each of Sound Energy and Saffron under the Binding Agreement is limited as follows:

(i) Sound Energy's total liability for all claims under the SEHIL Tax Covenant and certain of the Sound warranties in relation to licences held by APN shall not exceed £8.6 million;

(ii) Sound Energy's total liability limit for all claims under the Sound Energy warranties and in respect of the indemnities given by Sound Energy is £2.5 million; and

(iii) Saffron's total liability limit for all claims under the warranties given by it is £2 million,

it being noted that Sound Energy's total liability under (i) and (ii) shall not exceed £8.6 million, and that the financial limitations do not apply (in the case of Sound Energy and Saffron) to certain fundamental warranties or in the case of fraud or misrepresentation.

The information communicated within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

Vigo Communications - PR Adviser

Patrick d'Ancona

Chris McMahon

Kate Rogucheva

Tel: +44 (0)20 7830 9700

Sound Energy

James Parsons, Chief Executive Officer

j.parsons@soundenergyplc.com

Smith & Williamson - Nominated Adviser

Azhic Basirov

David Jones

Ben Jeynes