Key points:
- Tullow Oil and Capricorn Energy are to merge
- It's an all share offer at no premium
- That's why the market seems unexcited
Tullow Oil (LON: TLW) and Capricorn Energy (LON: CNE) are to merge in an all share deal which seems to have left the market distinctly unexcited. At pixel time Tullow is up 2% and Capricorn has barely moved. Given that the merger seems sensible enough on business grounds why is it that there's so little excitement about this? The answer probably being that there's no great excitement about an all share and agreed merger.
Both Tullow and Capricorn both drill for and extract oil in Africa. Combine the two and there's a larger African oil company. Which could be taken to be exciting and then again, perhaps not so much. Africa is a large place and operations in Ghana, Egypt, Gabon and Core d'Ivoire don't clearly and notably support each other in any obvious manner. Yes, the company will be larger in London so there could well be more institutional interest in the shares and so on.
The announcement itself talks about cost synergies and so on – things that ritually have to be said at such times. Combining the two sets of head office wallahs, the sales and trading operations, there are savings to be made there. The Tullow announcement seems to indicate such savings at £60 million a year which is not small change even in the oil business.
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It's also possible to look at the greater heft of the combined group. The deeper capital base makes exploration expenses easier to bear, also could lead to larger fields being attempted.
The truth is that on ongoing business grounds this looks like a pretty good deal. A merger of near equals in fact, to the benefit of both. The terms of the deal are 3.8068 New Tullow shares for each Capricorn Energy one. Current Tullow shareholders will own 53% of the expanded group, current Capricorn shareholders 47%.
All of which might actually explain why there's so little price reaction in either Tullow shares or Capricorn shares. It's an agreed merger, so there's no takeover fight to have on pricing or anything. It's fully agreed so there's little possibility of someone intervening with another offer. There's no control premium being paid as it is that merger of near equals, not a takeover. That is, there's just not much here to get the market excited in any short-term fashion. We all prefer a takeover fight to get the money juices flowing after all. Calm and collected business decisions just don't excite in the same manner.
As to the longer term it may well work well enough. Those cost savings look significant enough to pay for the inevitable disruption. Those intangibles of greater heft and weight could well work their magic.
As traders though we're more interested in shorter-term share price movements than that. Given that no one here between Tullow and Capricorn appears to have the upper hand it's not obvious that there's going to be any such short term excitement. An all share merger on rational long term business grounds? Could be great from an investment point of view but it's not, apparently, going to create trading fireworks.
