Spain's Repsol SA has ended a 15-month search for an acquisition to replace lost Argentine assets with an agreed bid for Canada's Talisman Energy Inc. that values the target at $12.9 billion including debt.
Repsol will offer C$9.33 ($8) per share for Calgary-based Talisman, valuing the business's equity at $8.3 billion and equating to a 56% premium to its closing price of C$5.97 on Monday.
The deal fills a hole in Repsol's upstream production left by Argentina's nationalization of the Spanish company's 51% stake in YPF SA in May 2012. It also puts to work $9 billion of cash at hand, about $6.3 billion of which was received from Argentina in compensation for the seizure of YPF.
Buying Talisman will "increase [Repsol's] output 76% to 680,000 barrels of oil equivalent per day and will boost reserves 44% to more than 2.3 billion barrels of oil equivalent," Repsol said on Tuesday.
The purchase will also rebalance Repsol's activities toward politically stable oil producing jurisdictions. North America will become Repsol's No. 1 region, accounting for about 50% of its upstream capital expenditure, up from 30%, while the riskier Latin America will fall to 22% of capex, from 50%.
"From an industrial-logic viewpoint it probably makes sense in the long run, but you have to ask the question why do the deal now and why in such a friendly manner?" said Banco Santander SA analyst Jason Kenney. "They could have waited until Talisman was really on its knees or gone hostile and probably got it for C$3 or C$4 cheaper."
Talisman shares had tumbled almost 65% in the past six months, prior to this week when reports emerged of an imminent Repsol bid.
Repsol said on Tuesday that it had been running the rule over Talisman and more than 100 other companies and assets for 15 months. The Madrid-based bidder was given access to Talisman's books in August and had been close to making an offer but paused as oil prices began to fall under pressure from the growing output from U.S. shale gas fields and after OPEC member countries said they would not cut their production to maintain prices.
Repsol also had concerns about Talisman's ageing and loss-making North Sea operations, which have been hit by increasing maintenance costs and come with significant decommissioning obligations. Talisman said earlier this year that it may cut its theoretical $637 million valuation of the assets, much of which are operated through Talisman Energy (UK) Ltd., a joint venture with China Petroleum & Chemical Corp., known as Sinopec.
Repsol's internal valuation of Talisman was higher than C$9.33 per share and the deal is expected to be accretive to shareholders from the first year after integration of the new assets, Repsol CEO Josu Jon Imaz told analysts on a call on Monday.
Repsol claimed the combination with Talisman will generate synergies of about $220 million a year from capital expenditure and overhead cost reductions as well as improved exploration effectiveness.
The deal will be initially financed from Repsol's cash at hand, though the Spanish oil company said it could sell as much as €5 billion of hybrid bonds to replenish its cash buffer.
Talisman posted net profit of $700 million for the first nine months of 2014 and had net debt of $4.7 billion at the end of September. Repsol posted net profit of $2.2 billion over the same period and had net debt of $2.5 billion.
The deal is subject to the approval of Talisman shareholders including Carl Icahn. The billionaire is likely sitting on a significant loss following his acquisition of a 6% stake in Talisman in October 2013, when shares in the company traded around C$12.
Talisman has agreed to a $270 million break fee should it accept a competing offer.
Repsol said it expected the deal to close by mid-2015. The Spanish bidder is taking financial advice from JP Morgan & Co. It has tapped Bennett Jones LLP for legal counsel.
Goldman Sachs Canada Inc. and Nomura Securities International Inc. are providing financial advice to Talisman. Norton Rose Fulbright Canada LLP is acting as Canadian legal adviser to Talisman and Wachtell, Lipton, Rosen & Katz is acting as U.S. legal adviser. Talisman's board is taking counsel from Blake, Cassels & Graydon LLP.
Shares in Repsol traded Tuesday at €15.45, down €0.24, or 1.5%, on their Monday close. The company has a market capitalization of €20.87 billion ($26 billion).