(Bloomberg) -- Capricorn Energy Plc.’s sale to Tullow Oil Plc. appears to be in peril, with more than a quarter of the shareholder base in the oil and gas company saying they plan to vote against the deal.
Capricorn investors Madison Avenue Partners, Kite Lake Capital Management, Legal & General Investment Management, Newtyn Management and Palliser Capital UK Ltd. all say they oppose the deal. Collectively, the investors represent more than 27% of Capricorn’s shareholder base, according to regulatory filings. The takeover requires the support of at least 75% of Capricorn’s shareholders who cast ballots.
The investors interviewed Wednesday said they saw little merit to the deal and few synergies between the companies.
“The transaction undervalues Capricorn, benefits Tullow at our expense, and trades the certainty of our cash for speculative Tullow stock,” said Eli Samaha, managing partner at Madison Avenue Partners. He urged the company to cease all discussions with Tullow and eliminate any expenses in pursuit of its “ill-conceived transaction.”
“We further recommend that the board retain new advisers and evaluate, with strong input from shareholders, the full set of alternatives available to maximize value,” he said. Madison Avenue Partners owns a 6.3% stake in Capricorn.
Representatives for Tullow and Capricorn declined to comment.
Tullow agreed to buy Capricorn in June in an all-stock deal that values the combined company at roughly £1.5 billion ($1.84 billion). The companies said at the time that the transaction would open up opportunities to expand across Africa.
“In our view, the deal doesn’t make any sense,” said Jamie Sherman, co-chief investment officer at Kite Lake Capital. “It’s a classic deal for scale, and there’s no reason for it. I don’t understand why Capricorn’s board would support a deal like this.”
Kite Lake Capital, which owns a 6.7% stake in Capricorn, plans to vote against the deal. Sherman estimates that Capricorn is worth at least 300 pence to 400 pence a share, or as much as a 77% premium to where the shares closed Wednesday. The underlying value is easy to understand, he said, because the vast majority of it is in cash or cash that will available in the near term.
David Windish, a partner at Newtyn Management, which owns a 5.3% stake in the company, said the transaction significantly undervalues Capricorn. His firm also intends to vote against the deal.
LGIM, which owns 3.9% of Capricorn and a 1.7% stake in Tullow, also said there is “no clear strategic rationale for the combination.” It also argued it would hurt Capricorn’s environmental footprint.
“This combination would not improve the resilience of Capricorn to the energy transition but worsen it,” said Nick Stansbury, LGIM’s head of climate solutions. “It would increase the exposure of Capricorn shareholders to oil as opposed to gas markets, increase financial leverage, and increase the probability of the combined entity growing oil production over time, potentially in higher cost basins.”
Activist investor Palliser Capital, which owns a 5.2% stake in Capricorn, reiterated its call for the company to walk away from the deal.
“Given the strong groundswell of opinion against the proposed merger, we urge the board to stop wasting time and money in pursuing this misguided transaction, and instead withdraw its recommendation for the deal and start a full and transparent strategic review,” said James Smith, chief investment officer of Palliser.
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