Scottish-headquartered Capricorn Energy has scrapped its proposed merger with Tullow Oil in favour of a tie-up with Israel's NewMed Energy to create one of the largest independent upstream companies listed in London.

The all-share deal is expected to complete in the first quarter of next year after paying a $620 million (£561.8m) special dividend to Capricorn shareholders. Together with the exchange of shares, the transaction values Capricorn at 271p per share versus approximately 210p under the agreement with Tullow.

Capricorn, formerly known as Cairn Energy, had previously agreed to an all-share "merger of equals" with Tullow to create an African-focused production company. However, some shareholders were concerned that the £1.5 billion deal undervalued the Scottish business.

The combined group will be listed in London under the NewMed name, with Capricorn chief executive Simon Thomson making way for NewMed chief executive Yossi Abu. Capricorn will issue new shares to NewMed investors based on an exchange ratio of approximately 2.34 per NewMed share, resulting in the Israeli company’s investors owning nearly 90% of the enlarged operation.

The new group will have a portfolio of 11.8 trillion cubic feet of gas with production focused in Israel and Egypt at a time when European countries are seeking alternatives to Russian supplies. NewMed, which has a 45% stake in the giant Leviathan field offshore Israel, will become the first Israeli company to own oil and gas assets in Egypt.

HeraldScotland: Simon ThomsonSimon Thomson (Image: Capricorn Energy)

"This transaction delivers our shareholders a substantial capital return, together with an ongoing stake in a differentiated UK listed company, shaped for the future of the energy industry,” Mr Thomson said.

“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."

Directors at Capricorn have withdrawn their intention to recommend the merger with Tullow, which was first announced in early June. The deal required approval from 75% of Capricorn’s shareholders and was opposed by a number of investors including Pallister Capital, which owns more than 5% of Capricorn.

Unveiling a disappointing set of half-year results in September, Capricorn said it was “assessing all options” to the proposed merger with Tullow even though directors still believed the deal would deliver “significant value”.

“The company is exploring a number of expressions of interest relating to alternative transactions, and is engaging with those parties expressing interest to evaluate potential outcomes,” Mr Thomson said at that time.

READ MORE: Capricorn considers ‘all options’ to £1.5bn deal with Tullow Oil

Including the special dividend, the total value of 271p per share for Capricorn investors represents a 13% premium to the stock’s closing price on Wednesday. It also represents a 36% premium to their closing price on May 31, the last day before the deal with Tullow was announced.

While Mr Thomson will be stepping down, Capricorn chief financial officer James Smith will stay on with NewMed. Mr Abu said the combination of the two operations will create a “true regional energy champion”.

“Secure, sustainable, and long-life cash flows will allow the combination to offer a compelling mix of capital distributions to shareholders and growth potential,” he said. “With Capricorn, we have a shared vision on a disciplined capital allocation framework and a strategy to potentially significantly increase our production while expanding to the LNG market with the aim of supplying Europe's growing gas demand.

Shares in Capricorn closed yesterday’s trading 6p higher at 245.6p, while those in Tullow fell 2.92p to 41.52p.