By Anna Muizniece, Marvin Stenersen, Gabriela Lenerte (Stockholm School of Economics), Tigran Minasian, Ross Barrett, Yagnesh Patel, Jian Wee Soh, Angus Wyllie (Imperial College London)
Photo: Chris LeBoutillier (Unsplash)
Overview of the deal
Acquirer: Capricorn Energy PLC
Target: NewMed Energy
Total Transaction Size: £6.6bn
Closing date: Expected Q1 2023
Acquirer Financial Advisors: Rothschild & Co (also sole sponsor), Goldman Sachs, Morgan Stanley (also broker)
Target Financial Advisors: J.P. Morgan
Acquirer Legal Advisors: Slaughter and May, Gornitzky & Co., Shepherd and Wedderburn LLP
Target Legal Advisors: Davis Polk & Wardwell London LLP, Agmon & Co. Rosenberg Hacohen & Co.
Capricorn is planning its reverse merger with NewMed Energy, an Israeli energy company, despite its plans to merge with Tullow earlier this year. The transaction will be paid as 2,744 new Capricorn shares to NewMed shareholders at a ratio of 2.34:1 new Capricorn shares per NewMed share. This will result in NewMed shareholders holding 89.7% of the new combination, with Capricorn shareholders holding the remaining 10.3%. NewMed has one producing asset which is a 45% holding in the Chevron-operated Leviathan field, which has 4 wells producing 12 BCM of natural gas per year. There is also an ongoing maritime dispute between Lebanon and Israel; this deal should assist in delivering energy security to European and African markets in the midst of Russia-induced uncertainty.
Company Details (Acquirer - Capricorn Energy PLC)
Capricorn Energy PLC is one of Europe’s leading independent upstream energy companies, focusing on independent oil and gas exploration, development and production. Listed on the London Stock Exchange (LSE) for over 30 years, Capricorn Energy holds a balanced portfolio of exploration, development and production assets in the United Kingdom, Israel, Egypt, Mauritania, Mexico, and Suriname. With its business strategy of maintaining maximum financial flexibility through proactive portfolio management, Capricorn Energy develops a strong balance sheet that gives it an edge to pursue more exploration opportunities and expand its production base into attractive markets. The company was formerly known as Cairn Energy PLC and changed its name to Capricorn Energy PLC in December 2021.
Founded in 1980, headquartered in Edinburgh, United Kingdom
CEO: Simon Thomson
Number of employees: 238
Market Cap: $843.5M (as of 16/10/2022)
LTM Revenue: $194.0M
LTM EBITDA: -$34.3M
LTM EV/Revenue: 0.4x
LTM EV/EBITDA: n.m.
Company Details (Target - NewMed Energy)
NewMed Energy, formerly known as Delek Drilling, engages in the exploration, development, production, and sale of petroleum, natural gas, and condensate in Israel and Cyprus. The company serves independent power producers and various industrial enterprises.
Founded in 1993, headquartered in Herzliya, Israel
CEO: Yossi Abu
Number of employees: <50
Market Cap: $2.75B (as of 14/10/2022)
LTM Revenue: $840.76M
LTM EBITDA: $697.23M
LTM EV/Revenue: 4.8x
LTM EV/EBITDA: 6.4x
Projections and Assumptions
At a time when Europe is increasingly looking for non-Russian energy supplies, the merger looks to create an Israel-Egypt focussed operation to satisfy that demand. On a conference call, Yossi Abu stated that the company was "weighing its options for developing Leviathan", the largest natural gas reservoir in the Mediterranean, and one where NewMed holds a stake of 45.3% working interest. Additionally, there is interest in offshore Mauritania and onshore in Egypt's Western Desert. Overall, NewMed Energy would produce an estimated 115,000 barrels of oil equivalent per day (boe/d), placing it as the second largest UK upstream independent producer by output, only behind Harbour Energy.
According to the terms of the deal, Capricorn will exchange its shares at a rate of 2.34 per NewMed Energy share, resulting in NewMed shareholders holding 89.7% stake and Capricorn shareholders owning the remaining 10.3%. Following the announcement, Capricorn shares saw a 10% rise to reach their highest level since 2018 whilst NewMed shares were down ~1%. The combined company expects to retain its premium listing on the London Stock Exchange and will also implement a listing of its entire issued share capital on the Tel Aviv Stock Exchange.
Immediately before the closing of the merger, Capricorn Energy's shareholders are to be paid a cash special dividend of $620m, at £1.72 a share. This puts the total value of the transaction at 271p per share for Capricorn shareholders, but will also leave the combined group with a net debt of $2bn (Stifel estimate).
The deal is due to close in Q1 2023, and is subject to regulatory approvals and approvals of shareholders of both firms.
The Capricorn and NewMed merger will create one of the largest independent upstream companies listed in London with a portfolio of 11.8 trillion cubic feet of gas, including a 45% stake in the Leviathan, one of the world's "most attractive" gas fields. According to Simon Thomson, CEO of Capricorn, the combined business will offer investors a gas business of scale, with the prospect of near-term growth, a dependable capital returns policy, and a compelling ESG narrative to support the energy-hungry markets of the Middle East, North Africa and Europe. The merger will also have long-term contracts which provide strong cash flow visibility.
NewMed CEO Yossi Abu added that NewMed and Capricorn have a shared vision on a disciplined capital allocation framework and a strategy to potentially significantly increase combined production while expanding to the LNG market with the aim of supplying Europe’s growing gas demand. In the future years the combination will play a pivotal role in the energy transition, through organic brownfield cost effective developments while delivering attractive returns to shareholders.
“By combining with Capricorn we are creating a leading MENA gas and energy company, whilst significantly benefiting the shareholders of both companies. With 2P & 2C reserves and resources of approximately 11.8 TCF, predominantly gas from Leviathan, low-cost and highly cash generative production, the Combination creates a true regional energy champion." - NewMed CEO Yossi Abu
Risks and Uncertainties
Gas and energy prices are both a value driver for the merger, and a risk factor given their inherent volatility. Volatility in energy prices seems probable going forward with recent developments, and upward pressure is in favour of the combined entity.
Activist pressure from Irenic Capital Management, a hedge fund that owns a 1.5% stake in Capricorn Energy, could place a further risk on the likelihood of this deal’s completion. The activist has asked Capricorn to abandon its sale in favor of selling its assets piecemeal, arguing such an auction could deliver a ~40% premium relative to the NewMed deal.
Such pressure is more potent given Capricorn have previously had to abandon a deal due to shareholder opposition - namely, the company was forced to scrap plans to merge with Tullow Oil following pushback from large investors who cited a lack of synergies between the two companies. If Capricorn and NewMed are unable to justify the value of NewMed’s assets to shareholders, including the giant Leviathan field, such pressure could prove a catalyst to the demise of the deal. However, NewMed’s more attractive assets versus Tullow’s, and the potential for offering NewMed a premium listing on the LSE, could make the strategic rationale more palatable to investors.
Firstly, looking at the longevity of gas prices: gas prices will decline eventually, and this will impact the companies, but given that the combined entity will have greater control over supply it will be in a stronger position to navigate these developments.
Secondly, on the ESG front, there is a drive for increased use of renewables which is a persistent risk. The companies are working towards ESG developments, but their business is still fundamentally carbon-based. Gas is long-term a carbon-based energy source and with the drive for renewables, it will be less in favour. However, the firm is set on transitioning their business to adapt to this, but how successful we will see.
“The combined business will offer investors a gas business of scale, with the prospect of near-term growth, a dependable capital returns policy, and a compelling ESG narrative to support the energy-hungry markets of the Middle East, North Africa and Europe.” - Simon Thomson, Capricorn CEO