NEW YORK, Oct. 22, 2019 /PRNewswire/ -- Paulson & Co.
Inc. ("Paulson"), as manager of funds holding 21.6 million shares,
or 9.5% of those outstanding, of Callon Petroleum Company ("Callon"
or the "Company") (NYSE: CPE), today sent a follow-up letter to the
board of Callon, released a presentation exposing numerous flaws in
Callon's statements of the purported benefits of the proposed
acquisition of Carrizo Oil & Gas Inc. ("Carrizo") (NASDAQ:
CRZO) and reiterated its opposition to the deal.
Paulson's opposition is based on the following additional
points:
1) The Carrizo transaction has already destroyed
substantial shareholder value and if consummated will permanently
impair Callon's value proposition. Since the deal was
announced, Callon's stock price has declined by 42%, with
shareholders losing $614 million in
value. This is due to the unjustified 25% premium offered
to buy Carrizo and the proposed dilutive Callon share issuance of
over 86%. Even accounting for the general decline in the
E&P sector, Callon's shares have severely underperformed.
Callon is clearly better off without this deal, in which case this
decline should be reversed.
2) The transaction enriches management, not
shareholders. We are shocked that, as part of this
transaction, Callon shareholders will entitle up to a $10.7 million golden parachute or "success fee"
to Joseph Gatto, James Ulm, Michol
Ecklund and Mitzi Conn for
structuring a deal in which Callon shareholders have lost over half
a billion dollars. As if this weren't enough, Callon's
shareholders must pay Carrizo management an additional
$29 million in change-in-control payments. When
added to financial advisory fees of $30
million, shareholders are being asked to entitle not one,
but two, management teams and their bankers nearly $70 million for the massive destruction of
shareholder value. If the transaction closes,
shareholders will not only suffer steep losses, they will be
paying fees to the parties responsible for causing the
destruction in value. The proposed compensation agreements are an
insult to shareholders and a mockery of good corporate
governance.
3) Callon's net debt explodes from $1.2 billion to $3.5
billion while Callon inexplicably claims that this deal
improves its balance sheet. Estimated annual cash
interest expense and preferred dividends will nearly triple from
$69 million to $184 million annually. Based on consensus
estimates, Net Debt/2020E EBITDA is expected to go from 1.9x
stand-alone to 2.4x pro-forma, including preferred stock. The
leverage impact from any asset sales is unclear because Callon has
not provided sufficient detail.
4) Callon management uses unreliable and non-conforming
financial metrics to try to persuade shareholders into approving
this transaction. Callon seemingly overestimates what
combined "free cash flow" is available for shareholders for
2020-2021. By capitalizing cash interest expense and
excluding preferred dividends ($368
million), capitalizing a portion of G&A expenses, and
excluding transaction expenses of $94.5
million and contingent payments to ExL of $75 million, Callon dramatically overstates its
free cash flow projections.
5) Callon claims that this deal is accretive on free
cash flow per share, yet our calculations based on management's
disclosures imply the deal is highly dilutive. In its
definitive proxy, Callon represents that on a stand-alone basis its
adjusted operating cash flow less capital expenditures for
2020-2021 equals $242 million, or
$1.06/share. In comparison, in
its deal press releases, Callon says that pro-forma for the merger
it expects to generate $300 million
of "free cash flow", or $0.72/share
for 2020-2021. Based on these, figures, which exclude the
above-mentioned costs, the proposed deal is dilutive to free cash
flow per share by an extraordinary 32%.
6) $600 million out of
the $850 million of total synergies
are derived from capitalizing unrealistic operational benefits,
which most analysts and investors heavily discount. In
addition, Callon's synergy projections overlook the $252 million value transfer from the premium
paid, exclude $60 million of value
loss attributable to restrictions on tax attributes, and ignore the
fact that the remaining purported synergies are shared 54% and 46%
by Callon and Carrizo shareholders respectively.
7) If Callon's board really wants to maximize value for
its shareholders, in the event this deal does not close, it
should explore an immediate sale with the formal engagement of
independent advisers. As part of such sale, Callon must
reach out to companies of all sizes, including larger ones who
would be interested in entering or increasing their Permian
exposure. Shareholders recognize that Callon is too small to
be cost-efficient and the best path forward to generate value is to
pursue a sale of the company.
We believe that Callon's board and management is pursuing the
transaction to entrench and enrich themselves. To justify a
value-destructive deal, Callon presents shareholders with
unreliable, non-GAAP financial metrics. In our view,
shareholders would be better off instead if the Carrizo transaction
did not proceed and Callon was to be sold. Accordingly,
Paulson will vote its shares against the Carrizo transaction and
against all of the proposed shareholder resolutions.
The full letter and presentation are attached to this press
release.
About Paulson & Co. Inc.
Paulson, founded in 1994, is an investment management firm
headquartered in New York.
Contact Details
Marcelo Kim
Paulson & Co. Inc.
212-599-6628
Cautionary Statement
Paulson & Co. Inc. ("Paulson") is not soliciting proxies
in connection with any matter brought before shareholders of the
companies identified in this letter or press release.
Clients, funds and accounts managed by Paulson (the "Paulson
Clients") may from time to time beneficially own, and/or have an
economic interest in, shares of the companies discussed in this
letter and as a result, the Paulson Clients have an economic
interest in the forward-looking statements, estimates and
projections discussed above and their impact on the companies
discussed in this letter. The Paulson Clients are in the business
of trading – buying and selling – securities, and may trade in the
securities of the companies discussed in this letter. You should
also assume that the Paulson Clients may from time to time sell all
or a portion of their holdings of one or more of the companies in
open market transactions or otherwise (including via short sales),
buy additional shares (in open market or privately negotiated
transactions or otherwise), or trade in options, puts, calls, swaps
or other derivative instruments relating to some or all of such
shares, regardless of the views expressed in this letter.
The views contained in this letter and press release
represent the opinions of Paulson as of the date hereof.
Paulson reserves the right to change any of its opinions expressed
herein at any time, but is under no obligation to update the data,
information or opinions contained herein. Under no circumstances is
this letter or press release intended to be, nor should it be
construed as advice or a recommendation to enter into or conclude
any transaction or buy or sell any security (whether on the terms
shown herein or otherwise). This letter should not be construed as
legal, tax, investment, financial or other advice. Additionally,
this letter should not be construed as an offer to buy any
investment in any fund or account managed by Paulson.
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SOURCE Paulson & Co. Inc.