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

The UK’s largest asset supervisor has warned it has “sturdy reservations” about Capricorn Vitality’s proposed £1.4bn tie-up with its London-listed rival Tullow Oil, claiming there’s “no clear strategic rationale” for the mixture.

Authorized and Normal Funding Administration (LGIM) has taken the comparatively uncommon step of talking out towards the all-share deal, which was introduced at the beginning of June with the unanimous backing of each corporations’ boards.

Different institutional traders contacted by the Monetary Instances additionally prompt the transaction was stacked in favour of Tullow’s shareholders and raised the prospect that the phrases may need to be sweetened to safe the required approval of 75 per cent of Capricorn shareholders.

LGIM, a high 10 investor in Capricorn with a 3.9 per cent stake, stated in an announcement despatched to the FT that “as a accountable investor, now we have sturdy reservations in regards to the proposed transaction”.

“It’s our opinion that there is no such thing as a clear strategic rationale for the mixture.”

The asset supervisor, which additionally has a 1.74 per cent holding in Tullow, stated it was involved the tie-up would “worsen” Capricorn’s publicity to the transition away from fossil fuels given it’s at the moment a fuel producer however Tullow has oil property. Gasoline is seen by some as a lesser evil because it has been utilized by some international locations as a transition gas.

The tie-up would “enhance monetary leverage, and enhance the chance of the mixed entity rising oil manufacturing over time, probably in larger value basins”, LGIM claimed, including: “We don’t consider there are materials synergies between the 2 corporations, their methods or their enterprise fashions.”

When saying the deal at the beginning of June, Capricorn argued it will create a number one London-listed however Africa-focused vitality group with property in international locations together with Egypt, Ghana, Gabon, Côte d’Ivoire and Kenya that would offer alternatives for future progress. The 2 corporations count on annual financial savings of $50mn by the second yr after completion.

Underneath the phrases of the transaction, Capricorn traders would obtain 3.8 new Tullow shares for every of their current shares. Tullow traders would personal 53 per cent of the mixed firm, with Capricorn’s shareholders taking the rest.

The deal has additionally raised eyebrows amongst different shareholders given it will enable closely indebted Tullow — whose web debt was $2.1bn on the finish of 2021 — entry to Capricorn’s money.

Beforehand often called Cairn Vitality, Capricorn final yr settled a long-running $1bn tax dispute with India and dedicated to return $700mn to shareholders via a $500mn particular dividend and $200mn share buyback programme. However it retained the rest of the settlement for potential acquisitions.

Some shareholders have questioned whether or not Capricorn might have discovered higher targets.

“It seems a greater deal for Tullow than it does for Capricorn,” one other high 25 shareholder in Capricorn instructed the FT, including that the deal would “repair” Tullow’s “careworn” stability sheet because it was successfully “issuing fairness to purchase one thing that’s primarily money with a number of [Egyptian] property on the facet”.

Investec analyst Alex Smith stated in a notice this week that the deal “seems beneficial to Tullow shareholders”, given the money injection.

However one other massive shareholder famous that purchasing publicity to the oil value would possibly truly be “interesting” for some Capricorn traders, given Brent crude is buying and selling at greater than $120 a barrel.

In an announcement, Capricorn stated that “We worth the views of all our stakeholders and can proceed to have interaction with them over the approaching months . . . We consider the mixture will present important near-term worth progress from diminished prices, accelerated progress and an everyday dividend distribution coverage.” 

Tullow declined to remark.

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