Investor LGIM airs doubts over £1.4bn tie-up of Capricorn Energy and Tullow Oil

The UK’s biggest asset manager has warned it has “strong reservations” about Capricorn Energy’s proposed £1.4bn tie-up with its London-listed rival Tullow Oil, claiming there is “no clear strategic rationale” for the combination.

Legal and General Investment Management (LGIM) has taken the relatively unusual step of speaking out against the all-share deal, which was announced at the start of June with the unanimous backing of both companies’ boards.

Other institutional investors contacted by the Financial Times also suggested the transaction was stacked in favour of Tullow’s shareholders and raised the prospect that the terms might have to be sweetened to secure the required approval of 75 per cent of Capricorn shareholders.

LGIM, a top 10 investor in Capricorn with a 3.9 per cent stake, said in a statement sent to the FT that “as a responsible investor, we have strong reservations about the proposed transaction”.

“It is our opinion that there is no clear strategic rationale for the combination.”

The asset manager, which also has a 1.74 per cent holding in Tullow, said it was concerned the tie-up would “worsen” Capricorn’s exposure to the transition away from fossil fuels given it is currently a gas producer but Tullow has oil assets. Gas is seen by some as a lesser evil as it has been used by some countries as a transition fuel.

The tie-up would “increase financial leverage, and increase the probability of the combined entity growing oil production over time, potentially in higher cost basins”, LGIM claimed, adding: “We do not believe there are material synergies between the two companies, their strategies or their business models.”

When announcing the deal at the start of June, Capricorn argued it would create a leading London-listed but Africa-focused energy group with assets in countries including Egypt, Ghana, Gabon, Côte d’Ivoire and Kenya that would provide opportunities for future growth. The two companies expect annual savings of $50mn by the second year after completion.

Under the terms of the transaction, Capricorn investors would receive 3.8 new Tullow shares for each of their existing shares. Tullow investors would own 53 per cent of the combined company, with Capricorn’s shareholders taking the remainder.

The deal has also raised eyebrows among other shareholders given it would allow heavily indebted Tullow — whose net debt was $2.1bn at the end of 2021 — access to Capricorn’s cash.

Previously known as Cairn Energy, Capricorn last year settled a long-running $1bn tax dispute with India and committed to return $700mn to shareholders through a $500mn special dividend and $200mn share buyback programme. But it retained the remainder of the settlement for potential acquisitions.

Some shareholders have questioned whether Capricorn could have found better targets.

“It looks a better deal for Tullow than it does for Capricorn,” another top 25 shareholder in Capricorn told the FT, adding that the deal would “fix” Tullow’s “stressed” balance sheet as it was effectively “issuing equity to buy something that is essentially cash with a few [Egyptian] assets on the side”.

Investec analyst Alex Smith said in a note this week that the deal “appears favourable to Tullow shareholders”, given the cash injection.

But another large shareholder noted that buying exposure to the oil price might actually be “appealing” for some Capricorn investors, given Brent crude is trading at more than $120 a barrel.

In a statement, Capricorn said that “We value the views of all our stakeholders and will continue to engage with them over the coming months . . . We believe the combination will provide significant near-term value growth from reduced costs, accelerated growth and a regular dividend distribution policy.”  

Tullow declined to comment.