Serica Energy (LON: SQZ) has knocked back a proposed merger by North Sea counterpart Kistos Energy (LON: KIST).
The investment company, the new ventue of industry veteran Andrew Austin, tabled a cash and share offer that valued Serica at over £1 billion.
Details about the merger, which Kistos said would result in the creation of a “leading independent North Sea champion”, were published on Tuesday.
Serica, which spudded its North Eigg prospect yesterday, has rejected the initial approach, and in a subsequent statement said it was “considering its position”.
Kistos is now calling on Serica shareholders to encourage the oil and gas operator to engage in “constructive discussions” about the proposals.
In response, Serica has advised its investors “not to take any action”.
Timeline of events
Representatives from Kistos – set up by Mr Austin, former chief executive of RockRose Energy, in 2020 – approached the board of London-listed Serica on May 16, asking to “engage in discussions regarding the merits of a combination of both companies”.
Two days later Serica’s top brass rejected the approach as there wasn’t “a specific proposal” to consider.
Then, on May 24, Kistos, which officially acquired its first UK North Sea assets on Monday, approached Serica again in writing with the proposed merger terms
Kistos valued the North Sea operator, which operates the Bruce platform, at £1.04bn.
The company reiterated its confidence in the “strategic merits and potential value creation” of the merger.
At the beginning of June, Serica told Kistos in writing that it had again rejected the approach, though it acknowledged that it “can see industrial logic” of merging the company’s portfolios.
© Supplied by CamarcoIt also suggested entering into a “limited mutual exchange of information under a non-disclosure agreement” to explore a transaction, an offer Kistos accepted.
Serica then made a non-binding cash and share offer for the entire issued and to be issued share capital of Kistos, valuing the company at 483 pence a share.
It was rejected a few days later on the basis that it was not at a “recommendable value” and that none of Kistos’ board would be retained.
In a statement, Kistos said: “The board of Kistos believes that the terms of the Serica Proposal are at the wrong price, with the wrong mix of stock and cash (given leverage capacity).
“The proposed combination by Kistos, in contrast, is at what the board of Kistos considers to be the right price, with the right mix of stock and cash, and with an intent to put in place the right combined team (drawn from both Kistos and Serica) to drive the combined company forward.”
Offer ‘underplays’ high gas price
Kistos gave an offer value of of 382p per Serica share, a 25% premium on its closing share price of 305p on Monday.
The bid comprises 0.2932 new Kistos shares and 246p for every Serica share.
Serica shareholders would own approximately 50% of the combined business, and would also receive a “significant cash component”.
But Nathan Piper, head of oil and gas research at Investec, believes there is currently a “shortfall” in Kistos’ offer, given the gas price.
He said: “Kistos seeks a business combination with Serica through a 65% cash and 35% share offer of 382p/share (a c.25% premium to the undisturbed price).
“In our view (and those of both management teams), the combination of UK/European gas weighted businesses makes sense.
“However, the offer underplays Serica’s exposure to high UK gas prices and the North Eigg exploration result, in our view. We expect discussions to continue to make up the shortfall on overall value and therefore the balance of ownership in any combined entity.”
Encouraging shareholders to act
Following Serica’s decision to reject the proposed merger, Kistos has appealed to the company’s backers.
It called on investors to encourage the Serica board to “engage in constructive discussions” about the plans.
© Supplied by Serica EnergyIn response, Serica has “strongly advised” its stakeholders not to become involved in the situation.
It said: “Serica is considering its position. There can be no certainty that an offer will be made, or as to the terms of any such offer.
“A further statement will be made as appropriate. Serica shareholders are strongly advised not to take any action.”
Reasoning
Kistos believes the union of the two companies has strong industrial logic, could unlock significant value creation and achieve increased scale.
The combined company would also be a “market consolidator”, with an optimised balance sheet.
Serica’s main assets are the Bruce, Keith and Rhum fields, which produce via the Bruce platform around 210 miles north-east of Aberdeen.
Meanwhile Kistos completed the acquisition of a stake in a package of West of Shetland assets, including a 20% interest in the Greater Laggan Area, on Monday.
It is anticipated that, should a merger go through, the new company would apply for the admission of its shares to a premium listing and to trading on the main market of the London Stock Exchange.
A FTSE 250 company
And at current market valuations, the new firm would rank among companies currently within the FTSE 250 index, Kistos said.
Kistos said: “The Board of Kistos strongly believes that an experienced management team with a clear track record, combined with effective oversight from an experienced Board, is key to delivering the opportunities presented by the Proposed Combination.
“Kistos would envisage employing a meritocratic approach to selecting the best individuals for the Combined Company drawn from the management teams and Boards of both Kistos and Serica.”
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