Norway's DNO has launched a hostile bid to buy all of Faroe Petroleum in a deal valuing the London-listed company at around 608 million pounds ($781 million), sending Faroe shares up by a quarter.
DNO, which already owns 28 percent of Aberdeen-based Faroe, returned to the North Sea last year after years of expansion in the Middle East focusing on Iraqi Kurdistan, with the aim of growing via acquisitions and other investments.
Shares in Faroe shot up 26 percent to 158.4 pence by 1415 GMT, above the 152p cash offer price. DNO stock rose 3 percent.
DNO said its offer represented a premium of 44.8 percent to the closing price on April 3, a day before the Norwegian company started to build up its stake.
"In the period between our first acquisition, triggering significant bid speculation, and this offer, the price of Brent crude has dropped 13 percent and oil and equity markets have entered a period of great uncertainty," said DNO Executive Chairman Bijan Mossavar-Rahmani.
"For those shareholders who wish to exit, DNO is therefore offering a considerable premium," he added.
Faroe accused DNO on Monday of failing to engage with it before making the offer.
"Faroe shareholders, are strongly urged to take no action in relation to their Faroe shares," Faroe said in a statement after DNO's move, adding it would make further announcements in due course.
Faroe CEO Graham Stewart told Reuters on Sept. 18 that Faroe preferred to stay independent.
The company expects to produce between 12,000 and 14,000 barrels per day (bpd) this year and is developing a number of promising oil prospects in Norway and Britain.
DNO said it set its acceptance condition at "owning a shareholding of one share plus 57.5 percent of Faroe's issued share capital, representing more than 50 percent of Faroe's fully diluted share capital."
It said it made the offer to safeguard its investment against Faroe's refusal to grant DNO a seat on its board and against moves to dilute shareholdings.
In August, DNO withdrew its request for seats on the board of Faroe amid an escalating war of words between the companies over Faroe's wider governance culture and strategies.
Paul Mumford at Cavendish Asset Management, holding between 1 and 2 percent of Faroe, said DNO would need to offer around 2 pounds per share.
"Given the falling oil prices, DNO clearly thought it could swoop in and secure itself a bargain. However, both the current and historical market price show that this bid wildly undervalues the company," Mumford said.
Sparebank 1 Markets analyst Teodor Sveen-Nilsen said the deal would give Faroe shareholder access to DNO's strong cashflow, but he added he expected DNO would need to increase the offer price by 10 to 20 percent.
BMO Capital Markets, which advises Faroe, said in a note that DNO's bid undervalued Faroe's assets and potential.
"We value the shares much higher at around 170 pence/share, although fully de-risked, our valuation increases to around 2.10 pounds/share," BMO's David Round said.
After DNO, Faroe's biggest shareholders are BlackRock, Aviva and Invesco.
($1 = 0.7795 pounds) ($1 = 0.7783 pounds)
(Additional reporting by Nerijus Adomaitis and Simon Jessop, editing by Louise Heavens)