Petroceltic International Plc says it will buy Melrose Resources Plc for £165m to strengthen its operations in North Africa and the Black Sea.
The Irish oil and gas explorer banks on Melrose's producing assets in Egypt and Bulgaria until its own exploration assets in Algeria start production in four to five years. Melrose held proved plus probable reserves of 84.2 million barrels of oil equivalent at the end of 2011.
"This (deal) is totally in line with our strategy to expand in the Middle East, North Africa and in the Black Sea region," Petroceltic chief executive Brian O'Cathain said.
Shareholders in Melrose, which also has operations in Romania, France and Turkey, would receive 17.6 Petroceltic shares for each share they hold, which represents a premium of 6 per cent to Melrose's closing price on Thursday.
Melrose will pay its shareholders a special dividend of 4.7 pence per share.
"We do not see this as a particularly good deal for Melrose shareholders," Oriel Securities' analyst Richard Griffith said in a note and downgraded Melrose stock to "reduce" from "buy".
Melrose Resources stock rose as much as 6 per cent on Friday morning, but gave up the gains to trade up marginally at 138 pence at 1100 GMT. Petroceltic's London-listed shares were down 7 per cent at 7.59 pence.
Petroceltic said it received commitments from Melrose's largest shareholder as well as some directors, who together own about 52.27 per cent of the company's outstanding shares, to vote in favour of the deal.
Petroceltic, which operates in Algeria, Italy and Iraq's autonomous Kurdistan region, stood by Melrose's production forecast of 28,000 barrels of oil equivalent per day for 2012.
"The production profile will rise substantially when the Algerian asset comes onstream in four or five years, and we have a clear line of sight to produce 40,000 to 50,000 barrels a day," O'Cathain said.
Petroceltic's shareholders will hold 54 per cent of the new company and Melrose shareholders the rest. The new company would list on the main board within 12 months.
O'Cathain would retain the top position at the new company.