Rights plan prevents acquiring large stake in company
SandRidge Energy (ticker: SD) may be facing an uphill struggle in its acquisition of Bonanza Creek Energy (ticker: BCEI), based on recent filings.
SandRidge announced the adoption of a short-term shareholder rights plan today. According to SandRidge, “The rights plan is designed to protect our shareholders’ right to vote, on a fully informed basis, on the proposal to approve the issuance of the Company’s common stock in connection with the proposed merger with Bonanza Creek.”
The plan is designed to deter acquiring control of the company “without appropriately compensating its shareholders for such control.” The plan will be triggered only if a group exceeds SandRidge ownership of 10% or more. Assuming the so-called “poison pill” plan is approved, it will be effective for one year.
SandRidge Chairman John Genova said, “Today’s actions are designed to protect the interests of all of our shareholders and preserve their ability to fully consider all information related to the proposed Bonanza Creek merger — including information which will be included in our proxy materials — and vote as they see fit. SandRidge looks forward to continuing to engage in constructive dialogue with shareholders regarding our plans for the business and the compelling strategic opportunity we see with Bonanza Creek.”
While not explicitly named, the plan is almost certainly targeted at Carl Icahn, who has disclosed a 13.5% stake in SandRidge. The activist investor has sharply criticized SandRidge’s proposed acquisition of Bonanza Creek, calling it “nonsensical.”
In a recent filing, Icahn said he looked “forward to hearing what possible justifications management could have for entering into such a seemingly ill-advised, dilutive and value-destructive acquisition and why they believe the transaction is anything more than an entrenchment technique.”
Another major shareholder of SandRidge, Fir Tree Partners, which owns about 7%, has also criticized the deal, saying SandRidge is paying too high a price. The transaction would also drain all SandRidge’s cash, according to Fir Tree.
EQT-Rice deal also saw opposition, but overcame
This is not the first time a major E&P deal has been opposed by activist investors this year. Jana Partners moved against EQT’s (ticker: EQT) acquisition of Rice Energy (ticker: RICE) earlier this year. Jana acquired a 5.8% stake in EQT, then began a campaign to oppose the deal. Jana was ultimately unsuccessful, as EQT completed the purchase of Rice earlier this month.
The transaction
SandRidge will acquire Bonanza Creek in a cash and stock transaction, increasing the size of the company by half in a single stroke.
The pro-forma company will combine SandRidge’s 38.8 MBOEPD and Bonanza Creek’s 15.8 MBOEPD, thereby growing SandRidge production by 41%. Bonanza Creek is more heavily oil-weighted, so oil production will increase by 80%.
Both companies are active in the Niobrara, but in separate locations. SandRidge has operations in North Park, a high basin in north central Colorado, not in the northeast plains. The company holds 123,000 acres in the play, and is producing about 1.4 MBOPD from the area currently. Bonanza Creek is also active in the Niobrara, in the traditional DJ basin. With 67,000 net acres, Bonanza Creek is producing 12.5 MBOEPD in the field.
SandRidge will pay Bonanza Creek shareholders a total of $36 per share, comprised of $19.20 in cash and $16.80 in SandRidge stock. Based on closing prices before the announcement, this represents a premium of 17.4%. following the transaction, Bonanza Creek shareholders will own about one third of the company, and one of the directors of Bonanza Creek will join the board of SandRidge.
SandRidge will fund the acquisition using debt, and expects to have a 1.0 net debt/EBITDA. The company has $38 million in debt and $98 million in cash currently, for a net debt of 0. This transaction involves two companies of roughly equal size, as SandRidge and Bonanza Creek each have market caps of around $675 million. The transaction is expected to close in Q1 2018.
Based on pre-announcement prices, this deal has a value of $746 million. This purchase price equates to $47,215 per flowing BOE and $8.19 per BOE of reserves. If production is valued at the standard $35,000 per BOEPD, SandRidge paid roughly $2,500 per acre, far lower than the $30,000 and higher that companies have paid for acreage in the Permian this year.
