Paulson & Co., the firm led by John Paulson (Trades, Portfolio), disclosed on Monday a new position in Callon Petroleum Co. (CPE, Financial) according to GuruFocus Real-Time Picks, a Premium feature.
A former mergers and acquisitions banker, Paulson established his hedge fund as a merger-arbitrage fund, seeking to make money from situations where one public company announces plans to take over another. Paulson established a seven-item checklist that grades a merger on criteria like definitive agreements, good strategic rationale, no financing conditions, no due diligence conditions, solidly-performing target, reasonable valuation and limited regulatory risk.
Transaction details and purpose
According to GuruFocus Real-Time Picks, Paulson purchased 21,593,523 shares of Callon Petroleum on Monday. Shares closed at $4.71, up 63 cents or 15.44% higher than the previous close of $4.08.
Paulson & Co. said in its Schedule 13-D filing that, in a letter to the board of directors, the firm plans to vote against Callon’s merger with Carrizo Oil & Gas Inc. (CRZO, Financial) for several reasons: First, the stock declined 36% since the merger announcement as investors are skeptical about the combined effect of poor quality assets, massive share issuance and lower price multiples. Additionally, the 25% premium to Carrizo shareholders is “unwarranted” as no other potential buyer is willing to pay such a premium.
The firm then said Callon, valued at the Permian Basin average, would be worth $6.69 per share, up 64% from the current share price. Due to the discrepancy between the current share price and the takeover value, the firm suggests the board pursue a sale of the company.
Stock rises on Paulson’s push of company sale
Shares of Callon rose from last Friday’s close on Paulson’s comments. According to GuruFocus data, the company's profitability ranks 7 out of 10 on several positive indicators, including a solid Piotroski F-score of 6 and net margins that outperform over 69.83% of global competitors. Additionally, operating margins have increased approximately 31.30% per year on average over the past five years according to a loglinear regression model.
Disclosure: No positions.
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