Debt-laden drilling company Premier Oil has been swallowed up by a rival, ending 86 years of independence and creating one of the largest fossil producers in the North Sea.
Premier will be acquired by Chrysaor, rescuing the embattled listed company from its looming mountain of debt but leaving its previous shareholders with little more 5pc of the enlarged group.
Premier chief executive Tony Durrant said that the move - which has been quietly under discussion for some time - will mean his company's ambitious plan to acquire BP's North Sea assets is scrapped.
Mr Durrant will leave Premier Oil after 15 years at the company. He also said that Hong Kong-based hedge fund ARCM had played a significant role in brokering the merger.
ARCM is one of Premier's largest shareholders and holds a significant portion of the company's debt.
The fund lent money to Premier, then built up a huge bet – one of the largest in UK company history – against the company's shares as a hedge, before agreeing in June this year to buy stock in the company at a discount following disagreements over strategy.
Mr Durrant said: "They've been pretty heavily involved. They're getting something like 60 cents in the dollar in immediate cash repayment."
He said that ARCM will retain a stake in the freshly merged company, which will remain listed on the London Stock Exchange under a new name.
Premier shares have fallen 83pc since the start of the year.
Under the terms of the merger, its $2.7bn (£2bn) debts will be cancelled and a cash payment of $1.2bn will be made to Premier’s creditors. Some Premier creditors will also swap debt for shares.
Premier stakeholders including existing shareholders will hold 23pc of the combined group, with Chrysaor shareholders owning the rest. Chrysaor’s largest investor, Harbour, is expected to have a 39pc stake.
Shares in Premier jumped as much as 13pc before falling back to be about 5pc higher.
Last month Premier said it aimed to raise $530m (£408m) on the stock market to help shore up its finances. It has suffered badly from a plunge in the oil price, with Brent crude collapsing from about $60 a barrel a year ago to as little as $19 at the height of the pandemic as drivers stayed home and businesses shut.
The combined company will produce some 250,000 barrels of oil a day, and the merger is subject to approval by shareholders and creditors.
Roy Franklin, chairman of Premier, said the board intends to recommend the offer to shareholders.
Linda Cook, chief executive of investor Harbour, said the merger will significantly increase the companies' leading position in the North Sea and will expand its footprint to Asia and Latin America.
She said: “We are excited by the Premier assets in these regions and view them as the foundations upon which to build material portfolios and further diversify the company.”
The deal is the third multi-billion takeover for Chrysaor in four years. Chaired by Ms Cook, former head of Shell’s gas and power division, Chrysaor leapt out of relative obscurity in 2017 when it bought about $3bn (£2.3bn) of Shell’s assets in the North Sea.
Mr Durrant said that Chrysaor's acquisition of ConocoPhillips UK for $2.7bn last year had made the merger offer much more attractive because of the scale it provided.
"We always thought that with Chrysaor's producing cash flow in the North Sea, plus Premier’s tax losses and international portfolio, you made an interesting company."
Analysts at Citi said: "The more robust financial position will allow the company to prioritise the most economically robust development projects and reduce costs to improve returns."
Peel Hunt analysts recommended that Premier shareholders back the deal even though their stakes will be reduced.
They said: "The shares will respond positively this morning as the prospect of an imminent, large dilutive equity raise is removed and the market looks to a new future that will provide considerably more reasons to retain ownership in the enlarged entity."