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Major shareholder slams Callon leadership over Carrizo deal


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Major shareholder slams Callon leadership over Carrizo deal

Paulson & Co. Inc. is renewing its effort to derail the planned $3.2 billion merger between Callon Petroleum Co. and Carrizo Oil & Gas Inc., describing the move as good for executives and bad for shareholders in an Oct. 22 statement.

With a 9.5% stake in Callon, Paulson is one of the company's largest shareholders and has adamantly opposed the planned all-stock transaction since its announcement. In a press release made public along with a letter to Callon's board of directors, the investment firm accused the company's leadership of spearheading a deal which "enriches management, not shareholders."

Paulson said the deal has already destroyed significant shareholder value, as Callon's stock has fallen from $6.40 per share on July 12 — the last day of trading on the New York Stock Exchange before the deal was announced — to $3.71 per share at the market's close Oct. 21. Completion of the deal, the firm argued, would "permanently impair" Callon's net value.

"Since the deal was announced, Callon's stock price has declined by 42%, with shareholders losing $614 million in value," Paulson said. "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 its response to Paulson's first letter opposing the deal, Callon said the merger, which would increase the company's position in the Permian Basin to more than 120,000 net acres, would be highly accretive for shareholders.

"We are creating a differentiated oil and gas company with scaled development operations focused on premier asset bases and supported by accelerated cash flow and capital efficiency. ... Together, we will be well-positioned to accelerate our strategy and deliver significant value to our shareholders," President and CEO Joe Gatto said. In its Oct. 22 letter, Paulson rejected that idea, saying the merger would hurt investors as Callon's net debt "explodes" from $1.2 billion to $3.5 billion upon closing.

"Callon inexplicably claims that this deal improves its balance sheet," the firm said, saying Callon's estimated annual cash interest expense and preferred dividends would jump from $69 million to $184 million annually.

Paulson pointedly said in its release that while shareholders have seen their value evaporate over the past three months, Callon executives stand ready to benefit personally if the merger is approved Nov. 14. The firm said it was "shocked" that Gatto and other members of Callon's leadership could receive up to a $10.7 million "success fee" upon completion of the deal, even as the company's stock has been halved in value.

"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," Paulson said. "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."