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Wednesday, 25 January 2023

Merger with NewMed looks dead after Capricorn directors quit en masse

Capricorn’s board jumps before it’s pushed: The chair, CEO, and three other directors of Capricorn Energy’s board have resigned, caving to pressure from shareholders led by activist investor Palliser Capital to overhaul the company’s management and block a proposed merger with Israeli energy firm NewMed Energy.

WHY DO WE CARE? Capricorn has a sizable portfolio of upstream assets in Egypt. The merger would have given NewMed control of those assets, paving the way for closer energy ties between Israel and Egypt boosting our ambitions to take Russia’s place as Europe’s go-to energy supplier. NewMed is a key supplier of natural gas to Egypt from its offshore fields, providing gas via the EMG pipeline to our two LNG plants on the Mediterranean coast.

The heads that rolled: Company chair Nicoletta Giadrossi and CEO Simon Thomson — who has been in the role for more than a decade — are among the five board members stepping down with immediate effect, while CFO James Smith and another director will exit before a general shareholder meeting on 1 February, according to a statement (pdf) by the board. That leaves just two of Capricorn’s nine directors still in place.

This marks a victory for activist investor Palliser: Palliser Capital — one of Capricorn’s largest shareholders with a stake of around 7% — led a charge against the company’s plans to merge with Israel’s NewMed, arguing alongside other shareholders that the proposed merger undervalues Capricorn and is “unnecessarily biased towards NewMed.” Pressure on Capricorn’s management ramped up after Palliser called for a vote to overthrow the seven board members on 1 February. Capricorn’s board looked set to fight back, scheduling a shareholders’ vote on the merger just hours before on the same day. But mounting support from shareholders for Palliser’s coup — helped along by recommendations in recent days from independent corporate advisors ISS and Glass Lewis that they reject the merger — looks to have forced Capricorn’s board into admitting defeat.

What now for the tie-up with NewMed? The move means the merger is likely dead in the water. In a statement to the Tel Aviv stock exchange, NewMed said it “estimates that the probability for the closing of the transaction has significantly decreased,” adding that it continues to examine “strategic alternatives.”

Capricorn shareholders are picky: This is the second time Capricorn shareholders oppose management's plans after scrubbing a proposed merger with Tullow Oil earlier this year.

What do the activists want instead? Take a guess. Palliser “wants much of the oil and gas group’s USD 700mn in net [capital] distributed to shareholders,” the Financial Times reports, while fellow activist shareholder Irenic is demanding the “immediate return of excess capital,” it said in a statement yesterday.

Palliser is promising a better path — especially as far as we’re concerned: “We welcome the board’s decision to step aside and enable a better path forward for Capricorn,” Palliser said in a statement. “We are confident that today’s announcement marks the first step towards governance reform and a new leadership team focused on optimizing value and delivering real growth in Egypt.”

Next steps: Shareholders will still convene on 1 February for the general meeting, where they will likely discuss new appointments to the board. Palliser has already disclosed its preferred candidates, who include Hesham Mekawi, the former Egypt and later North Africa regional president at BP, and Christopher Cox, the former CEO of Spirit Energy. The vote on the merger has been pushed to 22 February. The story also got coverage from Reuters and Bloomberg.

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