[Editor's note: this story was updated on Sept. 10 at 9:10 a.m. CST]

Billionaire investor John Paulson's hedge fund on Sept. 9 urged Callon Petroleum Co. to drop its proposed $3.2 billion acquisition of Carrizo Oil & Gas Inc., and instead consider selling itself.

Paulson & Co. funds, which hold about a 9.5% stake in Callon, said in a letter to the company’s board that adding Carrizo’s “inferior Eagle Ford assets will permanently reduce the attractiveness of Callon to potential acquirers”.

Callon offered Carrizo shareholders 2.05 shares for each Carrizo share held, or about $13.12 per Carrizo share based on Callon’s closing share price on July 12, representing a 25% premium. Shares of both companies have fallen since then and the deal now values each Carrizo share at $9.07.

RELATED: Callon Petroleum To Acquire Carrizo For $3.2 Billion

Paulson noted that paying a 25% premium for the acquisition is “unjustifiable” and said Callon will lose its standing as a Permian pure-play by acquiring a company with holdings in the Eagle Ford shale region of South Texas.

“If the board is truly interested in its shareholders, given the magnitude of the difference between the current stock price of Callon and its takeover value, it should pursue a sale of Callon,” the hedge fund said.

However, Callon’s holdings in the Permian shale basin do not have a natural fit with bigger shale producers, said Andrew Dittmar, an M&A analyst at data provider Enverus.

“Callon doesn't have an obvious suitor there,” he said.

The original $3.2 billion valuation, which would have Callon pay about $16,500 per acre in the Delaware Basin, is among the lower prices for such deals in the last few years, Dittmar said. Carrizo’s holdings in the Eagle Ford are mature and could add to the combined company’s cash flow without a lot of investment, he added.

Shares of Callon, which have dived 36.25% since the transaction was announced in July, were up about 11.3% at $4.54 on Sept. 9. Carrizo shares rose 7.6% to $8.61.

On Sept. 10, Callon issued this statement in response to Paulson.

"Callon maintains an open dialogue with all of our shareholders and welcomes constructive input toward the shared goal of maximizing shareholder value. Our Board of Directors is committed to acting in the best interests of Callon shareholders and will continue to take actions to deliver returns on their behalf.

The Board routinely surveys the strategic landscape and evaluates various opportunities to maximize shareholder value in the context of the prevailing operational, financial and strategic environments and remains committed to this ongoing effort. To this end, the Callon Board, with the assistance of outside financial and legal advisors, carefully evaluated the combination with Carrizo and determined that the transaction delivers compelling value to Callon shareholders.

We remain confident in the strategic and financial benefits of our combination with Carrizo, which will create a leading oil and gas company with scaled development operations focused on the Permian Basin in a transaction that is accretive on all per share metrics. The pro forma company will allocate more capital to the Permian Basin than the combined Callon and Carrizo standalone development plans, supported by strong free cash flow from the Eagle Ford Shale."

The combination of the two high-quality asset bases and complementary teams, Callon said, offers a larger footprint and competitive advantage in the Permian; generates free cash flow, improves cash returns on capital investments; and optimizes its core portfolio, etc.

Callon and Carrizo plan to continue with the transaction and expects it to close during the fourth quarter of 2019, subject to customary closing conditions, including the approval of shareholders of both companies.