Incremental Petroleum Ltd has recommended its shareholders reject Cooper Energy Ltd's $86 million takeover offer, saying the offer undervalues the company by some 70 per cent.
In its target statement released this afternoon, the takeover target said an independent evaluation of the offer by KPMG assessed the company's value to be between $3.39 and $4.18 per share.
Last month Cooper launched the bid and laid out two options, either 3.1 shares for every Incremental share or 50 cents cash and 1.9 shares for each Incremental share.
Incremental said based on Cooper's share price from yesterday, the value of the all scrip bid and the cash-scrip offer were at 74 per cent and 71 per cent discounts to KPMG's evaluation.
Incremental shares today closed three cents lower at 87 cents, while shares in Cooper were down 1c to 31c.
Incremental chairman Chris Cronin said there would be no material synergies from combining the two companies and that the hostile offer "materially" undervalued the oil producer.
"Incremental has built a substantial portfolio of high-quality, near-term production opportunities based on discovered resources under attractive fiscal terms," Mr Cronin said in the company's target statement.
"In contrast, Cooper offers a smaller, declining production base combined with higher-risk and higher-cost international exploration areas of relatively less attractive fiscal terms."
KPMG, which was commissioned by Incremental to compile a report on the offer, concluded the bid was not fair.
"In our view, Incremental can be set apart from other mid-cap oil and gas companies by its ability to achieve successful growth in reserves and maintain a dividend-paying regime whilst also largely shielding investors from high-risk, early stage exploration activities," KPMG said in its report.
Cooper executive director Greg Hancock defended the company's bid today, saying Incremental shareholders should apply a reality check to KPMG's report.
"It is out of touch and not realistic," Mr Hancock said.
"The value of something is what someone is prepared to pay for it - and Incremental's current share price is less than 25% of the expert's valuation.
"If the Cooper bid wasn't on the table, Incremental shares would fall even further.
"Incremental's directors have failed to offer any alternative, despite having a mere $1.3 million in net cash and will face huge difficulties in raising external capital.
"Cooper brings $65 million in cash reserves to the transaction."
The junior oil sector is facing a period of consolidation after the merger of ARC Energy Ltd and Australian Worldwide Exploration, and Roc Oil Company Ltd's bid for Anzon Australia Ltd.
A combined Incremental and Cooper will produce more than 2,000 barrels of oil a day and hold assets in Australia, Turkey, Indonesia, Tunisia and United States.