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Callon-Carrizo merger overcomes obstacles, meets shareholder approval

The drama surrounding Callon Petroleum Co.'s $3.2 billion acquisition of Carrizo Oil & Gas Inc. has come to a close with the Dec. 20 approval of the merger by Carrizo shareholders.

The merger, originally agreed upon in July, met with serious resistance from shareholders and investor advisory groups opposed to the deal. One of Callon's largest shareholders, Paulson & Co. Inc., came out quickly against the merger, saying it would "permanently impair" Callon's net value. The firm said the acquisition of Carrizo's Eagle Ford assets would strip Callon of one of its greatest value points: being a pure-play producer in the Permian Basin. Paulson suggested instead that Callon put itself up for sale.

Placed on the defensive, Callon attempted to assure investors that the agreement to acquire Carrizo would benefit them in the short and long term.

"[The acquisition] will accelerate our timeline on free cash flow, improve returns on capital and further strengthen our efforts to improve Callon's financial position," Callon CEO Joe Gatto said during the company's third-quarter earnings call. "We will be a stronger company with an advantaged cost of supply to improve our competitive position as the unconventional oil and gas business matures."

Upon shareholder approval, Gatto said: "Together with Carrizo, we are creating a leading oil and gas company that is positioned to accelerate the achievement of our stated goals regarding increasing returns on capital and sustainable free cash flow generation. As a larger enterprise, we will employ a more efficient scaled development model that will drive a lower cost of supply and underpin resilient performance over time."

While Callon's leadership and Paulson traded derisive public statements, opposition to the deal increased. Independent shareholder advisory firm Institutional Shareholder Services told Callon shareholders that the merger of the two companies would not be in their best interests. The level of opposition was strong enough that Callon and Carrizo's leadership agreed to alter the terms of the merger shortly before a Nov. 14 shareholder vote could occur.

Under the new terms of the merger, Carrizo shareholders will receive 1.75 Callon shares for each share owned, a decrease from the 2.05 shares originally agreed upon. The change means Callon will own 58% of the combined company, as opposed to the originally planned 54%.

The changes also eliminated a stipulation requiring Carrizo to reimburse Callon for expenses incurred had the transaction failed, while increasing the amount Callon would pay Carrizo in the event of a "no" vote to $10 million. If Carrizo had decided to back out of the agreement, the termination fee was dropped from $47.4 million to $20 million. The amendments also eliminated the controversial "double trigger" compensation for Callon executives should they be terminated as a result of the merger, one of the key points of contention for Paulson.

That was enough for both Paulson and ISS to come around to support the merger, albeit with some misgivings.