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LONDON, June 20 (Reuters) - Kite Lake, a hedge fund investor in Capricorn Energy shares, criticised the gas and oil producer's planned merger with Tullow Oil on Monday, saying the $827 million deal was value destructive to shareholders.
Kite Lake joins Legal & General Investment Management in criticising the deal which would create a 100,000-barrel of oil equivalent per day, Africa-focused producer in a deal paid for with newly issued Tullow shares..
The boards of both Tullow and Capricorn this month recommended shareholders agree to the deal.
The new company would have a better leverage ratio of net debt to core profits than Tullow, allowing the combined group to spend more and faster on increasing output. It would also be able to pay a regular dividend, ending a payout drought for shareholders in Tullow.
Jamie Sherman, co-chief investment officer of hedge fund Kite Lake Capital Management (UK) LLP, an investor in circa 4.6% of Capricorn shares, said the deal was "ill-conceived".
"(It) solely serves to transfer – at a substantial discount - the real tangible value within a Capricorn share today for a stake in Tullow that provides an illusory path to value creation and future shareholder returns for the owners of Capricorn," Sherman told Reuters.
"We believe that Capricorn owners deserve better, and are pleased to see that many of our views are shared by LGIM.”
Legal & General Investment Management, a significant shareholder in both Capricorn and Tullow, has said it had "strong reservations" about the proposed merger because it did not believe the deal would lead to major cost savings.
LGIM, the investment arm of UK insurer Legal & General , also said the proposed exchange ratio of 3.8068 Tullow shares for each Capricorn share was "highly unattractive to Capricorn shareholders".
Kite Lake is not invested in Tullow.
Some analysts, for example at Jefferies, have said the merger would be positive for Capricorn shareholders, while others, for example at Stifel, have said the deal would be more beneficial for Tullow shareholders.
A spokesperson for Tullow said the deal had a compelling strategic rationale, creating a group with a diversified resource based, investment opportunities across its portfolio and commitment to regular shareholder returns.
A Capricorn spokesperson echoed these points, adding Capricorn continued to engage with its shareholders on the merits of the merger. (Reporting by Shadia Nasralla; Editing by Jan Harvey and David Evans)
