LONDON - Capricorn Energy plans to merge with Israel's NewMed in an all-share deal after paying a $620 million special dividend to its shareholders, ditching a previous scheme to merge with Tullow Oil.

The Capricorn-NewMed deal would create an Israel-Egypt-focused gas producer including NewMed's stake in Israel's giant Leviathan offshore field at a time when Europe is looking for non-Russian energy supplies.

The new group would be listed under NewMed, formerly known as Delek Drilling, in London and led by Yossi Abu, the chief executive of NewMed whose shareholders will own 89.7% of the merged entity.

Capricorn's shares were trading up more than 10% after the announcement, hitting their highest level since 2018. Tullow's shares were down about 3.6% while NewMed's were down just under 1%.

Abu said the new group would aim to raise its production to over 200,000 barrels oil equivalent per day (boed) by the end of the decade from its current 115,000 boed.

"We are creating a company that for the first time allows international investors to get direct exposure to the East Med gas play and Leviathan in particular," Abu said.

It will be the first Israeli company to own oil and gas assets in Egypt, a neighbouring Arab state with a peace treaty with Israel and an energy-hungry population of around 100 million. Israel already supplies gas to Egypt after discovering large resources off its coast in the 2000s.

On a conference call, Abu said the merger better positions NewMed as a potential gas supplier for Europe, adding that the company was still weighing its options for further developing Leviathan.

One option is to build a floating liquefied national gas (FLNG) terminal, which has seen support from the Israeli government, he said. The other is to connect via pipeline to LNG terminals in north Egypt.

The deal would value Capricorn shares at 271 pence, a 13% premium to their last closing price. The deal with West Africa-focused Tullow, which declined to comment on Thursday's news, had valued Capricorn at around 210 pence per share.

Some Capricorn investors had come out against the Tullow merger plan.

The merger would see Capricorn issue new shares to NewMed investors based on an exchange ratio of around 2.34 per NewMed share, resulting in Capricorn shareholders holding just over 10% of the new company. The deal is due to close in the first quarter of next year.

Capricorn Chief Financial Officer James Smith will stay on with NewMed Energy, which is set to pay out at least 30% of its cash flow, expected to reach around $450 million a year after financing over the next five years, in dividends.

(Reporting by Shadia Nasralla; Editing by Angus MacSwanand and Mark Porter)