Tullow shareholders lose out as merger partner turns to new suitor

Shareholders in Tullow Oil are set to lose a potential lifeline after the company’s proposed merger of equals with cash-rich Capricorn Energy fell apart Wednesday.

apricorn, which had provisionally agreed to an all-share tie-up with ailing Tullow in June, has instead proposed a different merger with NewMed Energy after shareholders turned on the original deal.

The collapse of the proposal leaves Irish-founded Tullow empty handed just two weeks after chief executive Rahul Dhir assured investors that the merger was on track with the backing of both boards.

Capricorn’s board of directors plans to unanimously recommend the deal with NewMed and unanimously decided to withdraw from the merger with Tullow.

A completed transaction would have created a $1.9bn energy firm with assets spread from Ghana to Egypt and rescued Tullow from years of chronic underperformance, management departures and fire sales of assets to avoid insolvency.

Shares in Capricorn jumped as much as 8.9pc in London, with Tullow falling as much as 5.5pc after the announcement, signalling the relative divergence in fortunes from the switch.

The new merger would make the combined company one of the largest upstream energy independents listed in London, according to a statement on Thursday.

Under the terms, NewMed shareholders would own almost 90pc of the combined venture, with Capricorn shareholders taking the rest. NewMed will pay Capricorn shareholders a special dividend of $620m.

“The board has engaged in a robust and dynamic process to evaluate options for Capricorn and considered a broad range of external factors and market conditions,” said Nicoletta Giadrossi, chair of Capricorn. “We believe this is a compelling transaction which combines near-term value realisation with ongoing participation and value creation in a world-class gas company.”

Leaving Tullow “is unsurprising given increasing concerns over valuation and strategic rationale,” said Will Hares, a global energy analyst for Bloomberg Intelligence. “An Israeli offshore gas player offers far more compelling operational, regional, and gas synergies.”

More than a quarter of Capricorn’s shareholders last month said a proposed merger with Tullow lacked merit, undervalued the company, and that they would vote against the transaction.

One activist investor, Palliser, pointed out that two-thirds of Capricorn’s value was in cash and near-term receivables which Tullow was getting at a deeply discounted price. Palliser’s chief investment officer James Smith said the deal undervalued Capricorn by $500m, or two-thirds of its market value.

The new tie-up will combine NewMed, one of the largest gas producers in the Mediterranean, with Capricorn’s portfolio of production and exploration in countries including the UK, Egypt, Mexico and Suriname. The deal will create a “gas and energy champion” in the Middle East and North Africa, the companies said.

The transaction furthers NewMed’s expansion plans following a tie up with Israel’s Enlight Renewable Energy Ltd. earlier this year.

“We have a shared vision on a disciplined capital allocation framework,” NewMed CEO Yossi Abu said in the statement. The company aims to “significantly increase our production while expanding to the LNG market with the aim of supplying Europe’s growing gas demand.”

Both Capricorn and NewMed shareholders will need to approve the deal at respective general meetings.

(additional reporting, Bloomberg)

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