Capricorn Investor Slates Tullow Merger Plan


© BloombergWorkers in overalls walk along yellow walkway

Workers walk along an elevated walkway on the Tullow Oil Plc Prof. John Evans Atta Mills Floating Production Storage and Offloading (FPSO) vessel.

An investor in Capricorn Energy has expressed its opposition to the company’s merger plan, describing it as one sided in favour of Tullow Oil.

A letter from Palliser Capital, which owns more than 5% in Capricorn, said the deal lacked a meaningful strategic rationale and was a “disappointing step backwards in ESG”.

Capricorn should withdraw its support for the deal, the investor said, and carry out a meaningful review. Palliser said Capricorn could realise value of at least 330 pence per share, a 67% increase to the proposed merger plan of 197 pence.

Palliser first expressed its concerns to Capricorn on July 1, it said, and had a number of discussions with top executives.

“While we have listened carefully to and reflected deeply upon the perspectives that you have shared with us, we continue to strongly disagree with your view that the Proposed Merger represents an accretive step forward for the Company that equally benefits Capricorn and Tullow,” it said.

The deal is not a “merger of equals”, Palliser said, but a “poorly disguised nil-premium takeover of Capricorn by Tullow”. Tullow would use Capricorn’s cash balance to repay its “junk-rated creditors”, it said.

Talk of creating a “leading African energy company”, Palliser continued, is little more than a marketing ploy. There are no clear links between deepwater West Africa and onshore Egypt.

Capricorn shareholders will have 47% of the new company, while Tullow will have 53%.

Speculative turnaround

The deal is based on a bet by Capricorn management that Tullow’s opportunities have been misunderstood by the market. If Capricorn shareholders believe this, Palliser said, they can invest themselves in Tullow stock.

“Capricorn shareholders are faced with the prospect of giving up their cash to shoulder the burden of servicing this highly speculative turnaround story”, the letter said. “It is unsurprising to us that a number of equity research analysts at market-leading investment banks have similarly denounced the one-sided nature of this transaction.”

The deal also values Capricorn’s Western Desert assets at nothing, Palliser said. Capricorn paid $323 million in net cash less than 12 months ago for the package.

Palliser’s concerns on the ESG front focused on the merged company’s increased oil weighting, over gas.

The merger would be a lifeline for Tullow, Palliser said. The company would be able to pay down debt, invest in Ghana, help fund its plans in Kenya and “finally resume paying dividends”.

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