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On 12 July 2022, Kistos plc the terms of a proposed combination with Serica Energy plc which comprises a possible £1bn cash and share-for-share exchange offer by Kistos for Serica.

Under the terms of the possible offer, Serica shareholders would be entitled to receive 0.2932 new Kistos shares and a cash consideration of £2.46 per existing Serica share, representing a 25% premium to Serica’s closing share price of £3.05 on 11 July 2022.

Kistos revealed that it had previously approached Serica three times, twice in May 2022 and again in June 2022, requesting that the companies engage in discussions regarding the strategic merits and potential value creation of a combination of both companies. However, Kistos’ advances were repeatedly rejected by the board of Serica prompting Kistos to the terms of its proposal on 12 July 2022 in order to ‘urge Serica shareholders to encourage the board of Serica to engage in constructive discussions with the board of Kistos regarding the proposed combination.’

Kistos believes the combination to have a compelling strategic and financial rationale and said in its : 

‘The Board of Kistos believes that the proposed combination will create a leading independent North Sea champion, led by the right team with the right strategy…[and] has strong industrial logic, significant value creation potential and achieves increased scale, relevance and trading liquidity for shareholders of both companies.’

The British North Sea has undergone a significant changing of the guard in recent years, led by private equity groups who have poured in investment as energy majors have retreated from oil and gas production and continue to reshape their portfolios and focus their investment in lower-cost regions. The proposed combination of Kistos and Serica ‘would be expected to create a leading listed North Sea independent company, with pro forma combined reserves, strong operational performance and low unit production costs’.

Kistos, which has a market capitalisation of £384m compared to Serica’s £829m, has already made two acquisitions since floating on the London Stock Exchange in 2020, the latest being its acquisition of a 20% stake in the Greater Laggan Area from French oil major TotalEnergies which completed a day before it announced its possible offer for Serica. Should the Kistos offer proceed it will represent a reverse takeover transaction given its lower market capitalisation compared to Serica.

According to Kistos, Serica that its board ‘can see industrial logic in combining the portfolios of the two companies’ and suggested entering into a ‘limited mutual exchange of information under a non-disclosure agreement’ to explore a transaction, however Serica has repeatedly rejected the proposals made by Kistos that the Serica board believes that the Kistos possible offer materially undervalues the company and ‘is an opportunistic reaction to the recent and potentially temporary disconnect between Continental and UK gas prices’. In a response the Serica also said that the proposed terms announced publicly by Kistos ‘are the same as the terms outlined in a possible non-binding offer made by Kistos on 24 May 2022 that was rejected by the Serica Board on 1 June 2022’. 

After rejecting the Kistos offer, Serica that on 1 July 2022 it made a non-binding cash and share offer for the entire issued and to be issued share capital of Kistos, indicating that should Kistos announce a firm intention to make an offer for Serica, the company may be seeking to utilise the ‘pac-man’ defensive strategy, where the offeree in a hostile bid responds with a counter bid for the offeror. Under the terms of the Serica possible offer, Kistos shareholders would be entitled to receive 90 pence cash and 1.29 new Serica shares for each Kistos share, representing a 12% premium to Kistos’ closing share price on 30 June 2022, which Kistos considered to be a low premium given the effective change of control implied by the Serica possible offer which would see Serica shareholders hold 72% of the combined company post-transaction. Serica that it formulated its counter possible offer after recognising the industrial logic of a combination implemented through an appropriate structure, following the initial approach from Kistos. The company believes its possible offer to be superior to the Kistos possible offer which ‘would leave the combined entity with a weakened balance sheet’ however, Kistos did not share the same sentiment and rejected the Serica possible offer seven days later. Kistos stated that the Serica possible offer was not at a recommendable value as the terms of the proposal were at the wrong price with the wrong mix of stock and cash, given leverage capacity, and despite being positioned as a merger of equals, Serica had proposed that no Kistos senior management be retained and that no board members of Kistos should join the board of the combined company.

Following the announcement on 12 July 2022, Serica’s share price jumped 14% to £3.40 per share while Kistos’ share price increased by a more moderate 5% to £4.87 per share.

Both Kistos and Serica are required to announce whether or not they have a firm intention to make their respective offers by 9 August 2022. Market Tracker will continue to monitor these transactions as they develop.