Britain's largest gas retailer, Centrica, faced a setback in its battle to take over Venture Production on Monday, when the North Sea gas producer's two largest investors backed management's rejection of the $2 billion bid.
U.S. investment firm ArcLight Capital Partners and one of Venture's founders, Larry Kinch, which between them control 12.8 percent of Venture's shares both agreed that Centrica's 845 pence a share offer undervalued Venture.
I believe that Venture's shares have a value of at least 10 pounds per share, Kinch, who owns about 7.4 percent of the company, said in a statement.
Centrica, which said on Monday it had boosted its stake in Venture to 29.9 percent, is eager to boost its gas production so that it does not have to buy so much on the wholesale market, where prices are volatile.
Analysts agreed with the investors, saying that in valuing Venture's reserves at around $10/barrel, Centrica's offer was low compared with other North Sea deals done over the past year.
Centrica's offer of 845p for the remainder of Venture is cheeky in our view, Richard Griffith, oil analyst at Evolution Securities, said in a research note.
Gordon Gray at Collins Stewart said he estimated a net asset value of 938 pence a share for Venture but that the value of the business to Centrica was much higher because it has lower financing costs than Venture.
Venture shares were up 5.1 percent at 825 pence at 0906 GMT while Centrica shares edged up 0.9 percent at 220-1/4, against a flat UK market and oil and gas sector.
The UK's largest listed utility by market value said its offer, which valued Venture at around 1.3 billion pounds ($2.09 billion), would not be increased, unless a rival bidder emerged, in which case Centrica reserved the right to up its offer.
Under UK stock market rules, Centrica will not be able to improve its bid for at least 12 months, if the bid fails, or a rival bidder does not emerge -- something analysts consider unlikely given Centrica's 29.9 percent stake.
Shareholders face the risk that Centrica's bid will lapse and the stock falls back sharply.
However, if the economy recovers in the next year and oil prices rally, Centrica's take it or leave it strategy could backfire, forcing it to offer a much higher bid if it wants to secure control next year.
The rejection by management and key shareholders represents around 23 percent of the shareholder base, Griffith said, making it hard for Centrica to secure enough shares to enable it to delist Venture and fully integrate the oil and gas explorer's assets.
However, Centrica's offer is conditional on it gaining over 50 percent of the shares in Venture -- an additional 21 percent from where it is now, raising the prospect that it gains control but not full ownership of Venture.
Even a stake in Venture, whose North Sea reserves are mainly gas, would provide Centrica with a hedge for its gas supply obligations.
Centrica's approach is among a flurry of takeover bids in the past month, as firms sought to secure assets before economic recovery sent field prices soaring again.
On Monday, British oil and gas explorer Emerald Energy Plc, which has a market capitalization of around $600 million, said it had received a takeover approach.
Last month, UK explorer Heritage Oil agreed a $6 billion merger with Turkey's Genel Energy, while Chinese oil refiner Sinopec agreed a $7.24 billion takeover of Swiss oil explorer Addax Petroleum.
In March, Centrica bought a 22 percent stake in Venture for 725 pence a share and said it was considering making a cash offer for the company.
The utility held meetings with Venture management in recent months but the two sides failed to agree a price, prompting Centrica to make an offer direct to the British oil company's investors on Friday.
Venture swiftly rejected the offer and Chief Executive Mike Wagstaff told Reuters in an interview on Sunday that many investors were looking for significantly above 900 pence/share.
(Additional reporting by John Bowker and Victoria Bryan; Editing by Mike Nesbit and Simon Jessop)