As most North Sea watchers predicted, Norwegian oil firm DNO has made its bid for Faroe Petroleum (FPM), and the the 72 per cent of the company it doesn’t already own. The all-cash offer values Faroe at £608m, or 152p a share, and comes at a 20.8 per cent premium to the Alternative Investment Market group's undisturbed share price.
DNO was keen to emphasise that the offer also represented a premium of 45 per cent to Faroe’s share price on 3 April, the last business day before DNO started building its stake. The bidder’s executive chairman, Bijan Mossavar-Rahmani, said he was pleased to “engage directly with the Faroe shareholders”, a point Faroe appeared to echo in its response, when it reported that it had received no engagement from the Norwegian group prior to the bid.
In explaining the offer, DNO offered little detail on potential synergies between the companies, other than to highlight Faroe’s lack of assurance in “achieving its full value potential in a volatile commodity and financial markets environment as a relatively small scale, financially constrained UK Aim-traded company”. DNO also criticised Faroe’s corporate governance, a charge issued when it asked for a seat on the company’s board in August.
In pushing up the shares to 158p, the market appears to have decided that DNO’s bid will eventually increase towards Faroe’s 12-month high of 171p, when Brent crude surged to $85 (£66) a barrel. Since then, oil prices and equities have dropped sharply.
Faroe’s board rejected the offer, stating that it undervalued the company “on every available metric”, came in “substantially below” the average premium on UK takeovers in the sector over the last decade, and failed to reflect the group’s “exciting prospects as an independent business”.
The bid has long been expected. In August, Faroe warned its shareholders that DNO was poised to launch a takeover bid without paying a sufficient premium, four months after the nominally Middle East-focused DNO announced the acquisition of a “long-term strategic shareholding” in Faroe, as part of a strategic pivot towards the North Sea.
First came the purchase of a 15.4 per cent stake from Delek, accompanied by overtures that DNO would support Faroe management’s “growth-focused North Sea strategy”. That move was followed by a tender offer, and within a week DNO’s holding stood at 28.7 per cent. As it closed in on the 30 per cent mandatory offer level, the Norwegian group issued a “no intention to bid” statement under Takeover Code rules, thereby preventing it from making an offer for six months.
Commentary of the full all-cash offer has been largely dismissive. BMO Capital Markets said the bid was “opportunistic” given recent oil price weakness, and failed to “recognise the substantial project de-risking over the next few years that could drive our valuation to over £2 per share”. RBC suggested that shareholders will probably demand a premium that reflects Faroe’s growth.
