Key Energy Services, Inc. (ticker: KEG) has proposed a combination with Basic Energy Services, Inc. (ticker: BAS) in an all-stock merger.

On September 20, 2018 and again on September 23, 2018, Key sent letters to management and the board of directors of Basic outlining its merger proposal and its strong desire to negotiate a transaction. Copies of the letters are included below.

Key believes that the proposed combination is attractive strategically and financially for both companies given the highly complementary nature of their respective businesses and significant cost synergies that could be realized in the combination.

Key would own 51% of the combined company

Under the terms of the proposal, Key shareholders would own approximately 51% of the combined company and Basic shareholders would own 49%, representing a 15% premium to the 10-day VWAP1 before consideration of synergies.

Including the estimated annual run rate synergies of $65 million, Key believes that the estimated total value to Basic shareholders is equivalent to an approximate 89% premium to Basic’s unaffected 10-day VWAP1.

According to a press release, the 10-day VWAP reflects the volume-weighted average closing price of the preceding 10 market sessions for each Key and Basic. Based upon this calculation, the exchange ratio reflects $9.80 per Basic share based upon Key’s 10-Day VWAP of $13.36 per share as of September 19, 2018. Basic’s 10-Day VWAP calculated as $8.52 per share as of September 19, 2018.

Key’s President and Chief Executive Officer, Robert J. Saltiel said in a statement, “We are ready to move ahead swiftly to finalize a combination with Basic.”

On Sept. 19, Basic announced a proposed financing for $300 million of senior secured notes in a private offering to persons reasonably believed to be qualified institutional buyers, the company said in a press release.

“We believe the proposed financing announced by Basic could be detrimental to both the structure of a combination and its value to shareholders. Basic’s proposed financing would likely cause meaningful additional cost to a combined company, reducing the significant synergies shareholders would otherwise realize through a merger. As a result, the proposed financing might effectively preclude a combination between Key and Basic and prevent the substantial value creation for all shareholders enabled under our proposal,” Saltiel concluded.

Letter dated September 20, 2018 to Basic’s Chairman and Chief Executive Officer

Dear Gentleman:

As a follow up to our extensive prior dialogue, we remain convinced of the need and benefits for consolidation within our industry. It is with this as a backdrop that we submit the following proposal to you regarding a combination of our companies.

Proposal to Combine Key and Basic

As we have discussed, I am pleased to outline a proposal to combine Key Energy Services, Inc. (“Key”) and Basic Energy Services, Inc. (“Basic”) at a substantial premium to Basic’s current market value and the opportunity for your shareholders to participate in the substantial upside of the combined company going forward.

My Board and I believe that there are significant benefits to be realized for our respective shareholders from combining our businesses. We believe our proposal is strategically compelling and will be highly attractive to Basic’s shareholders. Key has appreciated the opportunity to engage with you in an open and collaborative fashion and hope you share our conviction in relation to the strategic merits of this combination.

Our Proposal

We are proposing a stock-for-stock combination at a fixed exchange ratio of 0.733x shares of Key for each share of Basic, which represents $9.80 per Basic share based on Key’s 10-Day VWAP of $13.36 as of September 19, 2018. The combined company would be approximately 48.7% owned by Basic shareholders. This represents a 15% premium to Basic’ 10 day VWAP.

Value Creation for Basic Shareholders

We believe this combination will be compelling to Basic shareholders and would deliver total value of in excess of $16.09 per share from the immediate premium and $6.29 per Basic share of synergies that are only achievable through a combination. The estimated total value to Basic shareholders of $16.09 per share is equivalent to an ~89% premium to Basic’s unaffected 10-Day VWAP of $8.52 as of September 19, 2018 and the upfront offer value alone of $9.80 per share represents a 15% premium to Basic’s unaffected 10-Day VWAP price as of September 19, 2018, and a ~6% premium to Basic’s closing price as of September 19, 2018.

We anticipate realizing $65 million of pre-tax, run-rate cost synergies per annum achieved through the reduction of SG&A and duplicate corporate and facilities/infrastructure costs, in addition to procurement benefits. Capitalizing these synergies at a historical average EBITDA multiple of approximately 5.5x would result in Basic shareholders benefiting from $6.29 per Basic share of value as a result of their approximately 48.7% ownership of the combined company. Basic shareholders would also get the opportunity to share in the substantial value creation we envision in the combination.

This value creation is set out in the chart at:

Furthermore, we believe a combination would enable the combined company to achieve significantly lower cost of capital, in particular on debt financing. Based upon our observations and knowledge of the debt markets, we estimate these savings could exceed 250bps or more per annum.

Strategic Benefits of a Combination

We believe this combination would provide substantial value to your shareholders, as well as strategic benefits to your customers and employees, including:

  • Creates Premier Oilfield Services Company: A combination of Key and Basic will create a production-focused oilfield services provider with limited customer overlap. The pro forma combined company would have 2019E revenue and EBITDA of $1.8 billion and over $275 million (including the impact of estimated synergies, with a run-rate of $65 million) and a pro forma net debt / 2019E post-synergy EBITDA of below 2.0×2.
  • Bolsters Existing Service Capabilities: Well services and fluid management would be core components of the combined company. The Key / Basic combination would also enhance rental and fishing and coiled tubing franchises. The combined company would have a broader geographic footprint with greater service density. Additionally, we believe there are meaningful benefits via the combination of Key’s corporate sales model with Basic’s field-level sales model that will enhance value for the combined company and its customers.
  • Meaningful Field and Corporate-Level Synergy Opportunities: We estimate annual cost synergies from this transaction to be $65 million. This results in $358 million of market value uplift potential when applying a 5.5x multiple, which equates to 66% of the current combined market capitalization of both Key and Basic, as of September 19, 2018.
  • Compelling Financial Profile: We believe the combined company would have significant financial flexibility due to the earnings power of the combined entity as a result of a broader footprint, increased geographic density and cost synergies. These factors will improve financing capabilities (debt and/or equity) due to the pro forma company’s improved liquidity position. As a result of a compelling financial profile, we believe that a refinancing of the pro forma company will be at greatly reduced rates and on better terms than either of us can achieve on our own.
  • Greater Liquidity for Shares in a Combined Company: Additionally, we believe that the combined company will be a more attractive security for equity investors through a higher float, increased trading liquidity and larger market capitalization.

Considerations with Respect to Recently Announced Notes Offering

We are aware of the secured notes offering recently launched on September 19, 2018 by Basic and are concerned that it could be detrimental to a combination of Key and Basic. We assume you also would not want the secured notes offering to stand in the way of such a value accretive option.

Therefore, we request that you suspend the pricing of your notes offering to allow time to negotiate a merger agreement, which we believe could be agreed by October 12th, given the extensive work that has been performed in the past.

As necessary to facilitate this combination, we are open to the consideration of a deleveraging transaction, including one back-stopped by our large shareholders.



Robert J. Saltiel
President and Chief Executive Officer


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