DNO Shareholders Approve Merger With RAK’s Middle East Units

DNO International ASA (DNO)’s shareholders approved a merger with RAK Petroleum PCL’s oil and gas units in the Middle East and North Africa after two months of wrangling over the issue.

Seventy-seven percent of shareholders voted in favor of DNO merging with majority shareholder RAK in exchange for DNO shares at an extraordinary general meeting in Oslo today.

“This is a large and resounding endorsement by the shareholders of the company’s board, the company’s management and the company’s direction and also of this merger,” DNO Chairman Bijan Mossavar-Rahmani said in an interview. “I’m pleased we have that larger mandate -- with all the noise and all the disinformation and misinformation that has been floating around, the company has been damaged, unnecessarily so.”

The transaction values DNO at $1.64 billion, or 9.50 kroner a share, and RAK’s operating subsidiaries at $250 million. Criticism of the move prompted RAK to enter an agreement with a group of minority shareholders yesterday. The deal will create a company with operations in northern Iraq, Yemen, the United Arab Emirates, Tunisia and Oman.

‘DNO’s Ambition’

“DNO’s ambition is to become a significant exploration and production company in the Middle East and North Africa region,” Chief Executive Officer Helge Eide said at the EGM today. “This merger creates a stronger platform for further growth. Growth will be done through transactions and acquisitions.”

Berge Gerdt Larsen, the former chairman of DNO who was voted off the board in June, worked to prevent the merger, saying the deal undervalued DNO and blocked a possible higher bid from other interested parties, such as Tony Hayward’s company Vallares Plc. Vallares bought Genel Energy International Ltd., also a Kurdistan producer, in September for $2.1 billion.

“I’ll give you a tip: Tony Hayward,” Gerdt Larsen said in an interview at the EGM. “We’re partners with Genel.”

DNO rose 2.1 percent to 6.705 kroner at the close in Oslo. The stock is down 26 percent this year, valuing the Oslo-based oil producer at 6.4 billion kroner ($1.1 billion).

RAK, which will get about 43 percent control of DNO through the deal, yesterday committed to reducing its stake to 30 percent by the end of 2012.

Board Candidate

The agreement with the shareholders’ group also states that an independent committee including smaller investors will be set up to propose a member for the board. RAK would support such a candidate, Mossavar-Rahmani said yesterday. RAK agreed to accept as many as 80 million treasury shares as partial settlement of the 153.4 million consideration shares it will receive, to reduce the dilution of shareholders’ ownership as a result of the merger.

DNO today said it had completed its open market partial tender offer for as many as 54.5 million common shares, which resulted in the company buying back 42.6 million shares at 7.50 kroner each. The company’s stock of treasury shares after the transaction is 68 million shares.

The board’s request for authorization to increase DNO’s share capital by as many as 100 million shares was not approved at today’s EGM. RAK as part of the deal with minority shareholder group DNO Initiative agreed to postpone the capital increase until the details for a secondary listing in London in 2012 had been established. The listing process would be accelerated, Mossavar-Rahmani said yesterday.

Kurdish Region

DNO, the first foreign company to begin pumping oil in Iraq since the 1970s, is awaiting outstanding payments for its exports from the Kurdish region after receiving two payments earlier in the year. Iraq’s central government agreed in February to resume exports from the semi-autonomous region and pay foreigners while it sought to resolve a dispute over oil contracts with the regional government. The Kurdish region accounted for 88 percent of DNO’s output last quarter.

DNO said in September that merging with RAK would add 7,500 barrels of oil equivalent a day to its average working interest output of 45,000 barrels. RAK’s contribution would rise to about 15,000 barrels a day within a year after the redevelopment of Saleh field off the U.A.E sheikhdom Ras Al Khaimah, the companies said. The company’s reserves would rise 15 percent to 406.6 million barrels, according to DNO.

DNO’s Chief Eide said in an interview that the company was already looking at “companies and projects” to acquire in the Middle East and North Africa, declining to specify where.

“Organic growth takes time and it’s risky and in the current global equities environment, there are tremendous opportunities to buy companies that are trading at 30-40 percent of net asset value,” Mossavar-Rahmani said. “It’s a lot cheaper now to buy oil on the London stock exchange or the New York stock exchange or Toronto by buying companies than it is to try to buy assets.”

To contact the reporter on this story: Marianne Stigset in Oslo at mstigset@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net

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