Tullow Oil’s plans to merge with cash-rich Capricorn Energy, in an effort to accelerate a reduction in its debt pile, may fail to secure the backing of its suitor’s shareholders, who stand to fare worse from the deal, according to analysts in a big US investment bank.
“We see Tullow as the relative winner in the proposed all-share merger with Capricorn,” said Bank of America (BoA) analysts, led by Mathew Smith, of the deal announced last week. “Given our view that the proposed deal’s benefits would be skewed to Tullow shareholders, we question whether the required 75 per cent Capricorn shareholder approval will be obtained.”
Capricorn was known as Cairn Energy until the end of last year.
The £1.4 billion (€1.64 billion) tie-up plan would see Irish-founded Tullow shareholders take 53 per cent of the larger entity. It would combine Capricorn’s $700 million-plus net cash position with Tullow’s $2.1 billion net debt, speeding up a decline in the latter’s borrowings, which stood at more than $3 billion in the middle of 2020.
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Still, Tullow is set to be the main driver of oil production, earnings and organic free cash flow for the foreseeable future, according to the analysts. This is mainly down to Tullow’s flagship oilfields, Jubilee and TEN, off the coast of Ghana.
However, the bank’s report noted that the value of the planned transaction implied that Capricorn’s cash made up 90 per cent of equity value being attributed to its business. This puts a $79 million value on the non-cash assets, a fraction of the $323 million the company paid for a 50 per cent stake in gas and oil assets in Egypt’s Western Desert hotspot last year.
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In a separate report on Capricorn, BoA said that securing the necessary approval of holders of 75 per cent of the company’s stock “may not be achieved”. Tullow only needs the support of more than 50 per cent of its investors.
Still, analysts from a number of other investment houses, including Germany’s Berenberg, Davy and New York-based Jefferies, have come out in favour of the deal.
A key investor pitch of the would-be merger partners is that the new company, which will not carry either the Tullow or Capricorn names, plans to deliver “sustainable” investor returns, with an annual base dividend of $60 million. This follows a decade of sporadic shareholder payments by both companies.
Tullow, which was founded by Irish man Aidan Heavey in 1985, has been through a tumultuous period in recent years. It had focused on selling off noncore assets after warning in late 2020 that it faced the risk of defaulting on its borrowings as cash remained tight.
However, it managed to carry out a big refinancing during the period, selling $1.8 billion of bonds and securing a new $500 million revolving credit facility.
