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Callon pressured to drop Carrizo acquisition

Investor instead urging Callon to sell off company

US independent Callon Petroleum is facing pressure from billion investor John Paulson’s hedge fund after the firm released a letter urging Callon to drop a $3.2 billion proposal to acquire Carrizo Oil and Gas and instead sell itself.

The firm on Monday in a letter to Callon’s board said it would vote against the all-stock acquisition of Carrizo. Paulson holds a 9.5% stake, or 21.6 million shares, in the Houston-based company.

The Carrizo takeover was announced on 15 July, and Paulson noted that the company’s stock price has fallen by 36% since then, adding that the share price drop "underscores investors’ deep scepticism of this transaction."

The deal would see Carrizo shareholders receive 2.05 Callon shares for each of their own, equating to a price of $13.12 per Carrizo share as of 12 July.

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Moreover, Paulson in the letter said that if Callon goes forward with the deal that it would lose its premium valuation as a pure play Permian producer. The acquisition of Carrizo’s "inferior" Eagle Ford assets in south Texas could also cause Callon to lose out on potential takeovers.

"The proposed acquisition of Carrizo, a primarily Eagle Ford producer, is an abrupt departure from the strategy that Callon has articulated," Paulson said, detailing Callon’s build-up of Permian assets throughout the years.

Callon's chief executive Joe Gatto in a call with investors following the acquisition announcement said the Eagle Ford play would allow the company to provide cash flow to fund longer projects in the Delaware sub-basin. The shorter cycle and less capital-intensive projects in the Eagle Ford would help fund plans to scale up in the Delaware, Gatto said.

However, Paulson in the letter also added that the deal offers Carrizo an unwarranted 25% premium, where Callon instead could be worth 64% more if it sold itself as Permian basin pure-players remain an attractive target for acquisitions, they said.

Carrizo has faced pressure from investors in the past year. Private equity firm Kimmeridge Energy urged Carrizo to sell off its position in the Eagle Ford and instead focus on the Delaware sub-basin of the Permian. Lion Capital had also called upon Carrizo to sell or merge.

The combined company would hold 80,000 net acres in the Eagle Ford, about 600 delineated operated locations. In the Permian, the companies would hold about 120,000 net acres with 1900 delineated operation locations.

The proposed deal is expected to close in the fourth quarter of 2019. Callon did not respond to an immediate request for comment.

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