Paulson Says Callon Should Target Sale Over Carrizo Purchase

(Bloomberg) -- Paulson & Co. has come out against Callon Petroleum Co.’s $1.2 billion deal to buy Carrizo Oil & Gas Inc., arguing the Permian Basin energy explorer should walk away from the deal and put itself up for sale.

The New York hedge fund, founded by billionaire John Paulson, said in a letter to Callon’s board Monday it owns a 9.5% stake in the company and plans to vote against the deal. Paulson noted that Callon’s shares had fallen about 36% since the transaction was announced in July, destroying about $530 million for shareholders.

After the letter, Callon’s shares rose 15% to $4.71 in New York trading, giving the Houston-based company a market value of about $1.07 billion. Carrizo closed up 12% to $8.94 on Monday, giving it a market value of $827 million.

“We believe Callon shareholders would be better off if Callon’s board and management pursued a sale,” Marcelo Kim and Jim Hoffman, partners at Paulson, said in the letter, which was obtained by Bloomberg.

Callon could be worth $6.69 per share in a sale, they said. That’s about 64% higher than where it traded at the end of last week.

The Carrizo transaction will provide “compelling value” to Callon shareholders, Callon said in a statement.

“We remain confident in the strategic and financial benefits of our combination with Carrizo, which will create a leading oil and gas company with scaled development operations focused on the Permian Basin in a transaction that is accretive on all per share metrics,” Callon said.

Callon said it expects the deal to close in the fourth quarter.

A representatives for Carrizo wasn’t immediately available for comment.

‘Unwarranted’ Premium

Callon is overpaying for Carrizo, Kim and Hoffman said.

“Callon is offering an unwarranted 25% premium,” they said. “According to the proxy, no other potential buyer of Carrizo was willing to pay such a premium.”

The transaction would give Callon “inferior” assets in the Eagle Ford shale that would discourage potential buyers of the company, they said. Companies that mostly operate in the Eagle Ford of south Texas tend to trade at a discount to companies such as Callon that primarily operate in the Permian, the most productive oilfield in the U.S., they said.

Permian explorers are worth more because they make more money. Deals including Occidental Petroleum Corp.’s takeover of Anadarko Petroleum Corp. underscore the attractiveness of the Permian, they said.

“We believe that there would be many acquirers interested in Callon,” Kim and Hoffman said.

To contact the reporter on this story: Scott Deveau in New York at sdeveau2@bloomberg.net

To contact the editors responsible for this story: Liana Baker at lbaker75@bloomberg.net, Christine Buurma, Michael Hytha

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