Palliser Capital Master Fund Ltd, one of Capricorn Energy PLC’s largest investors, on Tuesday said its proposed merger with Tullow Oil PLC is ‘one-sided’ and called for Capricorn to withdraw.
In June, Tullow and Capricorn announced an all-share merger. West Africa-focused oil and gas producer Tullow said the combination with fellow FTSE 250 constituent and Edinburgh-based Capricorn will create an African-focused energy company with a material asset base and a portfolio of investment opportunities delivering visible production growth.
Under the deal terms, Capricorn shareholders will receive 3.8068 new Tullow shares for each Capricorn share held, giving Capricorn shareholders 47% of the enlarged firm.
On Tuesday, Palliser said it ‘strongly’ disagrees with the proposed merger and encouraged Capricorn to immediately withdraw from the deal. Palliser currently holds a stake of more than 5% in Capricorn, making it one of the company’s largest investors.
Palliser said: ‘Rather than the touted ’merger of equals’, the proposed merger appears to us to be a poorly disguised nil-premium takeover of Capricorn by Tullow through which Capricorn’s substantial net cash balance, available after years of arbitration, would be applied towards repaying Tullow’s junk-rated creditors, with zero value attributed to Capricorn’s remaining high-quality and unencumbered assets.’
Palliser said that Tullow is ‘highly indebted’, with no distributable reserves and a portfolio of riskier, longer-dated assets. It added that the company is facing funding challenges, including a need to refinance high yield debt carrying a 10.3% coupon.
The shareholder explained that the merger would allow Tullow to raise over $700 million, by almost doubling its share count via the issue of new equity at an effective premium to its share price.
‘By providing access to Capricorn’s cash on a deeply discounted basis, the proposed merger would represent a lifeline for Tullow, potentially allowing it to (i) satisfy its creditors with a meaningful repayment of its outstanding junk rated high-yield debt; (ii) deliver on ambitious investment targets in Ghana; (iii) address scepticism from rumoured farm-in partners on its capacity to fund future capex for its stranded oil project in Kenya; and (iv) finally resume paying dividends to its shareholders,’ Palliser added.
It also said that the merger ‘materially undervalues Capricorn’. Palliser explained that the proposed consideration of 3.8068 new Tullow shares for each Capricorn share implies a price of 197 pence per share for Capricorn shareholders. This reflects a 1% discount to closing price of 198.50p on May 31, being the last business day before the merger was announced, and a 10% discount to the closing price of 220.20p each on August 8, being the last business day before Palliser sent its letter of disapproval.
On Tuesday morning, Capricorn Energy shares were up 3.2% to 227.00 pence each in London, meanwhile Tullow shares were up 2.0% to 52.85p each.
Based on its own analysis, Palliser believes that Capricorn can realise value of at least 330 pence per share, representing a 50% upside to the current share price. This also implies that the merger represents a value give-away of over $500 million, equivalent to almost two-thirds of the Capricorn’s current market capitalisation.
Based on this, along with wider shareholder dissent, Palliser sees it as ‘highly improbable’ that Capricorn will gather sufficient votes for the merger to be approved.
‘We believe the essential – only legitimate – course of action is for you, the Capricorn board, to immediately withdraw your recommendation for the proposed merger and initiate a transparent and meaningful strategic review with the best interests of Capricorn shareholders firmly in mind,’ Palliser added.
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