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LONDON (Reuters) - British oil firm Cairn Energy (CNE.L) said it agreed to buy UK-focused Nautical Petroleum NPE.L for 414 million pounds ($644 million), its second North Sea acquisition as part of a move to balance its high-risk exploration strategy in Greenland.
News of the offer sent Nautical shares soaring 54 percent to 460 pence, above the Cairn's 450 recommended cash offer price, signaling that some investors were bet a rival suitor could emerge with a higher bid.
Having failed so far to find oil in Greenland, where it has focused its energies and spent $1.2 billion in the past two years, Cairn said in March that it would look to spend some of its substantial cash pile to build up a business which would start producing oil in the near-term.
Analysts were divided over whether Cairn, which embarked on its new strategy in April when it bought privately-held North Sea firm Agora Oil & Gas for $450 million, could face a battle to secure Nautical.
"Given the level of the bid and the obvious synergies for Cairn we see the chances of a counter offer as relatively slim," analysts at Mirabaud said.
Westhouse analysts disagreed, arguing that Cairn's offer, which represented a 51 percent premium to Nautical's closing price on Tuesday, undervalued the explorer.
"It (Nautical) would be attractive to established North Sea companies looking to consolidate their reserves position and we would highlight Statoil (STL.OL), Maersk (MAERSKb.CO), TAQA TAQA.AD, Canadian independents and Kuwaiti National Oil Company as amongst potential counter bidders," they said.
Cairn, however, sits in pole position to acquire Nautical given that it said it had already secured acceptances from investors owning 27.25 percent of Nautical shares.
Buying Nautical will raise Cairn's exposure to the Catcher oil field, one of the biggest discoveries in Britain in recent years, which is due to start pumping oil in 2015 but which needs substantial investment to get to that stage.
The acquisition will give Cairn "access to near-term sustainable cash-flow to help fund future activities", Cairn's chief executive Simon Thomson said in a call with reporters, calling the deal "a logical next step" after Agora.
He added that Premier Oil (PMO.L), the project leader on the Catcher development, estimated the cost of bringing Catcher on-stream at between $1.6 billion and $2.8 billion.
"We have extremely good financial flexibility. Following the completion of this transaction for cash, we will still, at the end of this year, have over $200 million. We've obviously got our holding in Cairn India which is valued at over $2.5 billion, we've got debt funding capability, so we've got a number of options," Thomson said, when asked how Cairn would fund the development of Catcher.
Should this deal go ahead, Cairn, which wants to spend cash flow from the North Sea on exploration in Cyprus, Spain and Greenland, will have spent $1 billion out of the $1.2 billion cash pile it set aside for acquisitions after disposing of part of its stake in its Indian business Cairn India (CAIL.NS) in 2011.
"The Nautical acquisition adds to Cairn's momentum and should be perceived as a positive by the market, as cash is deployed well, to bolster near-term development and exploration," Bernstein analyst Oswald Clint said.
Cairn's takeover bid for Nautical spurred hopes that other independent oil firms like it will lead further consolidation in the UK North Sea, a region where dozens of small companies operate and which the oil majors such as Shell (RDSa.L) and BP (BP.L) have increasingly been moving away from since production peaked in 1999.
Consolidation hopes boosted shares in smaller North Sea players including Valiant Petroleum VPP.L and Ithaca IAE.L, which were up by 10 and 6 percent respectively.
Shares in Cairn traded down 1.88 percent to 286.4 pence at 0956 GMT valuing the company at 1.73 billion pounds.
Rothschild advised Cairn while Investec advised Nautical on the deal. ($1 = 0.6432 British pounds)
Editing by Paul Hoskins and Hans-Juergen Peters