By Carolyn Cohn and Shadia Nasralla
LONDON (Reuters) -Legal & General Investment Management, a significant shareholder in Capricorn Energy and Tullow Oil (LON:TLW), said on Monday it had "strong reservations" about a proposed merger between the two companies.
Tullow and Capricorn agreed an all-share merger earlier this month in a deal worth around $827 million, paid for in newly issued Tullow shares.
The deal, which needs shareholder approval from both groups, would create an Africa-focused producer of around 100,000 barrels of oil equivalent per day with a regular dividend, ending a payout drought for Tullow shareholders.
"In our capacity as a responsible investor, we have strong reservations about the proposed transaction," LGIM, the investment arm of UK insurer Legal & General, said in a statement.
The merger would increase the exposure of Capricorn, a gas-focused producer, to oil, LGIM said, adding it did not believe the deal would lead to major cost savings.
The proposed exchange ratio was "highly unattractive to Capricorn shareholders", LGIM said, adding it was "surprised and disappointed" that Capricorn's board had recommended the deal.
LGIM has a 3.91% stake in Capricorn and a 1.74% stake in Tullow. It is the eighth-biggest shareholder in Capricorn and 16th-biggest shareholder in Tullow, according to Refinitiv Eikon.
Stifel analyst Chris Wheaton said in a recent note the deal would be much better for Tullow and described it as "effectively a rights issue disguised as a merger".
Jefferies analysts called the merger "positive" and bringing "greater scale and purpose" in a recent note about Capricorn.
Tullow and Capricorn shares were down 1.9% and 1.2%, respectively, by 1042 GMT, compared with an index of European oil and gas producers that was down 2.9%.
Asked about the LGIM comments, a Tullow spokesperson said there was a compelling strategic rationale to form a new group with diversified, organic growth potential and regular shareholder returns.
A Capricorn spokesperson said it would continue to engage with its stakeholders on the merits of the merger, pointing to reduced costs, accelerated output growth and regular dividends of the proposed new group.
“Other top 20 shareholders have fed back that the merger makes sense," Capricorn's Group Corporate Affairs chief David Nisbet told Reuters.