Capricorn/NewMed: better price would align stars for E&P deal

In the world of star signs, Capricorn denotes an overachiever. But the UK’s Capricorn Energy, a hydrocarbons exploration and production company, is following a different destiny.

Despite a soaring oil price, shares have barely moved this year. This shows how deeply out of favour explorers are with investors. It forces Capricorn, formerly Cairn Energy, to seek a defensive merger. Now its second attempt at doing so is under attack from unhappy shareholders.

After a failed merger with Tullow Oil, Capricorn favours a share-based deal with Israeli E&P NewMed. Activist Palliser Capital, with 7 per cent of the shares, disagrees. It called on Monday for the replacement of all but two of the board, including chief executive Simon Thomson.

Capricorn shareholders are getting a price of almost a third more than from Tullow. But Palliser believes that still undervalues the company. Palliser plans to vote down the deal and is pushing to oust the board.

Palliser sees scope to renegotiate contracts with the Egyptian government. It thinks 315p to 400p a share for Capricorn is fair. That is about a quarter and a half more than the NewMed deal. Put another way, NewMed is getting Capricorn at a 40 per cent discount to its net asset value despite its own shares trading at par.

The deal needs majority support to proceed. Palliser says at least 40 per cent of shareholders are opposed. The fund also counts shares equal to 28 per cent of the total in favour of replacing the board. A successful outcome for the latter is likely to halt the deal too.

NewMed would get a premium listing on the London market via the terms of a reverse takeover. That explains why Capricorn directors are set to receive 40 per cent of the combined group’s board seats despite an equity contribution of just one-tenth.

Some elements of this deal are out of balance and shareholders are right to dissent. The market’s message to NewMed appear clear. For the stars to align and the transaction to complete, a more generous exchange ratio is needed.