12 July 2022
Proposed Combination of Kistos plc with Serica Energy plc
· Kistos believes that the Proposed Combination will create a leading independent North Sea champion, led by the right team with the right strategy
· Kistos believes that the Proposed Combination has strong industrial logic, significant value creation potential and achieves increased scale, relevance and trading liquidity for shareholders of both companies
· Kistos considers that the Proposed Combination would position the Combined Company to be a market consolidator, with an optimised balance sheet
· It is anticipated that, following completion of the Proposed Combination, the Combined Company would apply for the admission of its shares to a Premium Listing and to trading on the Main Market of the London Stock Exchange, given that, at current market valuations, the Combined Company would rank among companies currently within the FTSE 250 index
· Accordingly, this announcement is being made by Kistos 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 plc (“Kistos”) is today announcing a proposed combination with Serica Energy plc (“Serica”) (the “Proposed Combination”).
The Proposed Combination comprises a possible cash and share-for-share exchange offer by Kistos for Serica, whereby Kistos would offer for each Serica share (the “Proposed Combination Terms”):
· 0.2932 new Kistos shares; plus
· cash of 246 pence, comprising:
o a distribution of capital to Serica shareholders via a cash payment of 67 pence per share (in addition to the already announced dividend of 9 pence per share in respect of the 2021 financial year, which was approved by Serica shareholders at the Serica annual general meeting on 30 June 2022 and is expected to be paid on 22 July 2022 (the “Serica Dividend”)); and
o cash consideration equivalent to 179 pence per Serica share.
Based on the closing price of 463 pence per Kistos share on 11 July 2022 (the “Latest Practicable Date”), the Proposed Combination Terms give an offer value of 382 pence per Serica share, representing a premium of:
· 25% to the closing price of 305 pence per Serica share on the Latest Practicable Date; and
· 22% to the six-month volume weighted average price of 312 pence per Serica share on the Latest Practicable Date.
Under the Proposed Combination Terms, Serica shareholders would own approximately 50% of the issued share capital of the combined business (the “Combined Company”), in addition to receiving a significant cash component.
While Serica has stated that its Board “can see industrial logic in combining the portfolios of the two companies”, the Proposed Combination has been rejected by the Board of Serica.
Accordingly, this announcement is being made by Kistos to urge Serica shareholders to encourage the Board of Serica to engage in constructive discussions with the Board of Kistos regarding the Proposed Combination.
Background on discussions
On 16 May 2022, Kistos approached the Board of Serica in writing, requesting that it engage in discussions regarding the merits of a combination of both companies (the “Initial Approach Letter”). The Initial Approach Letter contained significant detail on the strategic merits and potential value creation for shareholders of both Kistos and Serica. Two days later, on 18 May 2022, the Board of Serica informed Kistos in a letter that it had rejected the approach as it did not represent, in its view, “a specific proposal for the Board [of Serica] to consider”.
On 24 May 2022, Kistos approached the Board of Serica again in writing with the Proposed Combination Terms and reiterated Kistos’ confidence in the strategic merits and potential value creation of the Proposed Combination, expected to be achieved through a re-rating driven by scale, trading liquidity, balance sheet strength and the right team with the right strategy (the “Second Approach Letter”).
On 1 June 2022, the Board of Serica informed Kistos in writing that it had again rejected Kistos’ approach. Serica’s letter accepted Kistos’ view regarding the strategic merit of a combination, stating that the Board of Serica “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” (the “NDA”) to explore a transaction, with Serica’s letter further stating, “we [the Board of Serica] further propose that the default basis upon which those conversations are pursued is that any combination would be affected [sic] through an acquisition of Kistos by Serica”.
With an agreement in principle on industrial logic, Kistos accepted the suggestion from Serica to enter into an NDA in order to agree on offer terms and structure. After Serica had conducted due diligence, Kistos received a proposal from Serica on 1 July 2022 (the “Serica Proposal”).
Under the terms of the Serica Proposal, Kistos shareholders would receive for each Kistos share:
· cash of 90 pence; plus
· 1.29 new Serica shares.
The Serica Proposal represented a premium to the closing price on 30 June 2022 (the day before the Serica Proposal) of 12% – a low premium given the effective change of control implied by the Serica Proposal, which would see Serica shareholders hold approximately 72% of the Combined Company post-transaction. As of the Latest Practicable Date, the Serica Proposal implies a value of 483 pence per Kistos share, a premium of 4% to the closing Kistos share price of 463 pence per share.
On 8 July 2022, the Serica Proposal was rejected by the Board of Kistos on the basis that it was not at a recommendable value as it failed to recognise the inherent value in the existing Kistos portfolio, let alone the potential value creation that the Combined Company could generate. In addition, 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.
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 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.
Compelling strategic and financial rationale
The Board of Kistos continues to believe that there is compelling industrial logic in the combination of Serica and Kistos, and that the Proposed Combination would create significant value for shareholders of both companies.
The Board of Kistos believes that Serica and Kistos trade on materially lower multiples versus their wider UK and Western European listed upstream independent peers and that the Proposed Combination has the potential to drive a re-rating of the Combined Company as a result of:
1. Achieving scale and relevance: Indicatively the Combined Company would have a market capitalisation of more than £1.8 billion if the Combined Company re-rated in line with the Peer Group median of 1.7x EBITDA[i], and would offer investors access to key market themes, those of energy supply and security, at a crucial moment for the industry. It is also anticipated that following completion of the Proposed Combination, the Combined Company would apply for the admission of its shares to listing on the premium segment of the Official List of the Financial Conduct Authority (“FCA”) (“Premium Listing”) and to trading on the main market for listed securities (the “Main Market”) of London Stock Exchange plc (the “London Stock Exchange”), given that, at current market valuations, the Combined Company would rank among companies currently within the FTSE 250 index; index inclusion would be expected to drive investment flows into the Combined Company’s stock and raise its profile with investors;
2. Enhancing operating position: The Combined Company would be expected to create a leading listed North Sea independent, with pro forma combined reserves which are c.86% operated, and strong operational performance and low unit production costs compared to the Peer Group;
3. Optimising the combined balance sheet: The Combined Company would be expected to have the scale and ability to optimise its balance sheet. On the basis of the Proposed Combination Terms, the pro forma Combined Company leverage (net debt divided by December 2022E EBITDA) is anticipated to be well below the Peer Group median;
4. Strengthening the cash flow: The Combined Company would be expected to generate significant and resilient free cash flow, enabling the Combined Company to consider a sustainable dividend policy;
5. Creating a platform for growth: The Combined Company would have optionality for both organic and non-organic growth over time, supported by the optimised balance sheet. The Kistos management team has a proven track record of M&A execution and resource development; and
6. Leading in ESG: In line with Kistos’ mission statement, and the reality faced today where energy security and a commitment to tackling climate change must be equally balanced, the Combined Company would be well positioned to support the energy transition through its c.85% gas-weighted production, whilst maintaining a focus on becoming an industry leader for its carbon emission credentials.
The Board of Kistos strongly believes that an experienced management team with a clear track record, combined with effective oversight from an experienced Board, is key to delivering the opportunities presented by the Proposed Combination. Kistos would envisage employing a meritocratic approach to selecting the best individuals for the Combined Company drawn from the management teams and Boards of both Kistos and Serica.
Kistos is making this announcement in order to provide Serica’s shareholders with the opportunity to make their views known regarding the attractiveness of a Proposed Combination, and to urge Serica shareholders to encourage the Board of Serica to engage in constructive discussions with Kistos.
A presentation will be held today at 09:30 today, 12 July 2022. You can access the presentation via the link below, using the password “welcome”. You can also listen via conference call by dialling the numbers below, using the access code: 2591 607 9892
Link to Webcast: https://mmitc-collab.webex.com/mmitc-collab/onstage/g.php?MTID=e203971ef52e4b79deadb13e6ac3d27ab
United Kingdom: +44 20 3467 2616
Netherlands: +31 70 700 6779
A playback facility for the presentation and a copy of the presentation will be made available shortly on the Company’s website at www.kistosplc.com.
Important Takeover Code notes
In accordance with Rule 2.6(a) of the Takeover Code, Kistos must, by not later than 5.00 p.m. (London time) on 9 August 2022, either announce a firm intention to make an offer for Serica in accordance with Rule 2.7 of the Takeover Code (a “Kistos Firm Offer”) or announce that it does not intend to make an offer for Serica, in which case the announcement will be treated as a statement to which Rule 2.8 of the Takeover Code applies. This deadline will be extended only with the consent of Serica and the Panel on Takeovers and Mergers (the “Panel”) in accordance with Rule 2.6(c) of the Takeover Code.
Pursuant to Rule 2.5 of the Takeover Code, Kistos reserves the right to:
1. Vary the form and/or mix of the consideration for the Proposed Combination at its discretion; and
2. Make an offer at any time at a lower value or on less favourable terms:
a. with the recommendation or consent of the Board of Serica;
b. if Serica announces, declares or pays any dividend or any other distribution to shareholders (in which case Kistos will have the right to make an equivalent reduction to the Proposed Combination Terms), excluding the Serica Dividend;
c. if a third party announces a firm intention to make an offer for Serica on less favourable terms than the Proposed Combination Terms; or
d. following the announcement by Serica of a Rule 9 waiver pursuant to the Takeover Code or a reverse takeover (as defined in the Takeover Code).
A further announcement will be made as appropriate. There can be no certainty that a Kistos Firm Offer will be made.
Kistos confirms that this announcement is not being made with the consent of Serica.
The Board of Kistos does not expect any significant anti-trust or other regulatory approvals. However, should any requirements arise, it is not expected that such approvals would be significant hurdles to the completion of the Proposed Combination.
For the purposes of UK MAR, the person responsible for arranging release of this Announcement on behalf of Kistos is Andrew Austin, Executive Chairman.
Andrew Austin, Executive Chairman
c/o Camarco Tel: +44 (0) 20 3757 4983
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