Ithaca Energy Inc (IAE.L) (IAE.TO) has agreed to buy Valiant Petroleum Plc VPP.L for 203 million pounds ($308.2 million) in cash and stock, in a deal that will enable it to double its 2013 production forecast from oilfields in the North Sea.
Valiant shareholders would receive 307 pence in cash and 1.33 Ithaca shares for each Valiant share, Ithaca said in a statement.
The offer represents a premium of 37 percent to Valiant's Thursday closing price on the London Stock Exchange. Valiant shares climbed toward the offer price on Friday, while Ithaca's stock fell 10 percent.
The deal will be funded by Ithaca's existing cash resources and a bridge credit facility from Banc of America Securities Ltd, BNP Paribas and The Bank of Nova Scotia.
Smaller oil producers and explorers in the North Sea are consolidating in a drive to revive flagging output in British waters.
In a study published in December, the University of Aberdeen forecast that British oil output from the North Sea would rise in the next few years, reflecting more investment, high prices and tax breaks.
Ithaca said the acquisition of Valiant, which focuses on the UK and Norwegian Continental Shelves, would more than double its 2013 production forecast to 14,000 to 16,000 barrels of oil equivalent per day.
Ithaca said the deal would help it transform itself into a leading mid-cap North Sea oil and gas operator, with proven and probable reserves of about 74 million barrels of oil equivalent.
Ithaca will also gain about $500 million in UK tax allowances through the deal, under the tax breaks provided by the British government to boost output from the North Sea.
Ithaca's London-listed shares were down 8 percent at 117.75 pence at 1535 GMT. It's Toronto-listed shares were down 7 percent at C$1.83 on the Toronto Stock Exchange on Friday.
"It is a good strategic fit, perhaps, but it is a big price to be paying," said Edison Investment Research analyst Ian McLelland.
He said he expected more mergers between North Sea oil companies while their share prices were below what the industry would expect to pay.
Valiant put itself on the block in September.
Its shares rose 35 percent to 469.25 pence on Friday morning.
"For Valiant, the strategic process had been going a long time. The share price had gone down and down," Canaccord Genuity analyst Charlie Sharp said. "I guess hope of a happy outcome had receded."
Cenkos Securities Plc advised Ithaca on the deal while Valiant's board was advised by Morgan Stanley
($1 = 0.6588 British pounds)
(Additional reporting by Ankur Banerjee in Bangalore; Editing by Don Sebastian and Robin Paxton)