Shares in Serica Energy closed more than 14 per cent higher yesterday as investors digested the implications of its decision to knock back a proposed merger with smaller North Sea rival Kistos.
The Kistos proposals dating back to May 24 value Serica at £1.04 billion but were rejected in early June. However, London-listed Serica acknowledged the “strategic merits and potential value creation” of the merger and followed up with its own offer to take over Kistos, which was also rejected.
Details were made public yesterday morning as Kistos urged Serica’s shareholders to “encourage” board directors to engage in constructive discussions. Serica said it is “considering its position” but “strongly advised” its shareholders to take no action.
Nathan Piper, head of oil and gas research at Investec, said he believes there is currently a shortfall in the offer from Kistos given the levels of wholesale energy prices. Serica, which operates the Bruce platform in the UK central North Sea, produces roughly 5 per cent of the UK’s domestic gas supplies.
“Kistos seeks a business combination with Serica through a 65% cash and 35% share offer of 382p per share,” Mr Piper said, noting that this was a 25% premium to Serica’s closing share price on Monday.
“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 discussion to continue to make up the shortfall on overall value and therefore the balance of ownership in any combined entity.”
News of the merger discussions came a day after Kistos, which was set up in 2020 by former RockRose Energy chief executive Andrew Austin, completed its acquisition of a 20% stake in the Greater Laggan Area from French oil major TotalEnergies to add to its assets in the Dutch North Sea. The company is looking to further strengthen its foothold in the area.
Meanwhile, Serica announced on Monday that it has started drilling operations on a new exploration well near the Bruce platform that will, if successful, provide gas to the UK domestic market from 2025 to 2035. Results from the North Eigg prospect are expected in mid-October.
Representatives from Kistos approached Serica on May 16 asking to “engage in discussions” on the merits of combining the two companies. The board of Serica rejected the approach two days later as there wasn’t “a specific proposal” to consider.
Kistos followed up six days later in writing with the proposed merger terms. These included 0.2932 new Kistos shares and 246p in cash for each Serica share, putting a total value of 382p on each share in Serica.
READ MORE: Shares in Serica soar as it hails impact of North Sea tax breaks
This was again rejected, though Serica acknowledged the “industrial logic” of bringing the two portfolios together.
Serica, led by chief executive Mitch Flegg, then made a non-binding offer to take over Kistos which valued the latter at 483p per share. This included 1.29 new Serica shares plus 90p in cash for each Kistos share.
The board of Kistos rejected this on July 8 on the basis that it failed to “recognise the inherent value in the existing Kistos portfolio”, with no members of the senior management team or board of directors at Kistos remaining after the deal was completed.
"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 company said. "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,”
Shares in Sercia closed yesterday’s trading 43p higher at 348p, while those of Kistos were up 24p at 487p.
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