Dubai's Emirates National Oil Company (Enoc) has agreed to pay $1.9 billion to take control of Dragon Oil in a further push by the state-owned refiner into exploration, even as the emirate struggles under a huge debt burden.
Dragon's committee of independent directors, formed after the bid approach was announced in June, advised investors to accept the 455 pence a share bid for the 48 percent of Dragon ENOC does not own, valuing the Turkmenistan-focussed oil explorer at 2.36 billion pounds ($3.88 billion).
Analysts said the stock was probably worth more -- Werner Riding at Ambrian said he still valued it at 500 pence a share -- but that it was the best offer investors were going to get.
"We believe that 450p/share is the minimum share price minority shareholders will accept ... and given that another bidder is not likely to emerge, the offer is likely to go through," Taleh Musayev, oil analyst at Merrill Lynch said.
One hedge fund manager, who holds the stock, agreed: "It's not great but it's kind of there. I think it has a good chance of success," he said.
Dragon said in a statement on Monday that the offer represented a 34.6 percent premium to Dragon's closing price on the last trading day before it received the bid approach.
However, Peter Hutton, oil analyst at NCB brokers, recommended investors hold out for a higher bid and raised his price target for the stock to 805 pence.
Dragon shares traded up 8.5 percent at 445 pence by 1032 GMT.
Enoc is a downstream-focussed company, operating service stations, fuel terminals and oil tankers in the gulf region.
Its investment in Dragon has largely been a financial one, industry sources said, and one of the key aims of the deal is to bring Dragon's upstream oil and gas exploration and production expertise in-house, Enoc said.
Its acquisition of Dragon Oil is the first large-scale acquisition by a Dubai government entity in more than two years and comes as the emirate seeks to restructure a debt pile of about $80 billion.
Dubai, one of the UAE's seven emirates, propelled itself into the spotlight as a tourism hub during a six-year oil-fuelled boom, but the downturn rocked its foundations based on excess lending and a transient expatriate population.
Enoc will fund the bid from its own cash and debt provided by Standard Chartered and the National Bank of Dubai, part of Emirates NBD ENBD.DU, Dragon said.
Any debts taken on to fund the acquisition need not be a drain on Dubai or Enoc for long.
Dragon had almost $900 million in cash on its balance sheet at the end of June, which some analysts believed it should have used to make acquisitions in the first half of the year when the credit crunch hit oil field prices.
Enoc could use the money to repay some debt taken out to purchase the 48 percent stake while Dragon's strong cashflow the company generated $120 million in the first half could sustain a high level of gearing inside the company.
Dragon's main assets are oil and gas fields in Turkmenistan, which has become a focus for international oil companies in recent years after a change in leadership led to a more open approach toward foreign investment.
Last week, Dubai raised $1.9 billion in the biggest Islamic bond sale from the Gulf Arab region this year, marking the emirate's return to the fixed-income market.
The government of Dubai launched a $6.5 billion bond plan in October, consisting of $4 billion euro medium term notes and a $2.5 billion Islamic bond, or sukuk, programme to help refinance debt and finance infrastructure development.
