LINN Energy makes historic offer for Berry Petroleum

First ever acquisition of a public C-Corp by an upstream LLC or MLP

In the first ever acquisition of a public C-Corp by an upstream LLC or master limited partnership (MLP), LINN Energy LLC (Nasdaq:LINE), LinnCo LLC (Nasdaq:LNCO) and Berry Petroleum Co. (NYSE:BRY) have signed a definitive merger agreement pursuant to which LINN and LinnCo will acquire all of Berry's outstanding shares for total consideration of $4.3 billion, including the assumption of debt. The transaction, which is structured as a stock-for-stock merger of Berry with LinnCo followed by the acquisition of the Berry assets by LINN, is expected to be tax-free to Berry shareholders.

An eye-opener
In a company statement released today, Berry Petroleum Co. president and CEO Robert Heinemann said the combination of the two companies would create one of the largest independent E&P companies in North America, and analysts at Baird Equity Research agree, calling the deal a “major eye opener” for the E&P sector.

“Expect other small- and mid-cap E&P C-corps to rally. LINE is not done with acquisitions and the market should extrapolate that to other potential targets such as Whiting Petroleum,” said Baird analysts in a note to investors this morning.

Denver, CO-based Berry Petroleum recently appeared at No. 36 in the OGJ150 Quarterly ranking of companies by total assets for 3Q12. The company's assets add to LINN’s geographic presence in California, the Permian Basin, East Texas, and the Rockies, and gives LINN, who came in at No. 15 in the OGJ150 Quarterly for the same time period, "an attractive new core area" in the Uinta Basin, noted LINN in its statment, saying Berry Petroleum’s long-life, low-decline, mature assets are a good fit for an MLP/LLC.

And, while the acquisition price "appears cheap on P/NAV, it appears fair on an EV/EBITDA multiple basis," noted analysts with financial services firm Stifel, who don't expect to see competing offers. The deal appears "friendly," they noted, and there is a general lack of interest from other E&Ps for California heavy oil which comprises most of Berry's production.

BRY averaged 36,400 boepd (75% oil) in 2012 production. Overall production of Berry Petroleum’s assets stand at 240 MMcfe/d, increasing LINN's current production by 30%, while proved reserves of approximately 1.65 Tcfe increase LINN's estimated proved reserves by 34%. LINN has identified additional probable and possible reserves at Berry of approximately 3.8 Tcfe and, with the acquisition, added approximately 3,200 producing wells and more than 200,000 net acres to its portfolio.

The deal may also be an eye-opener for Berry investors, noted Stifel. "We do expect significant share turnover if the deal closes as BRY investors will have a different investor profile than that of public MLP investors," they said.

Price
The consideration to be received by Berry Petroleum shareholders of 1.25 LNCO shares for each share of BRY is valued at $46.2375 per Berry share based on Wednesday’s closing price for LNCO, noted Global Hunter Securities analysts Thursday. “This represents a premium of 19.8% to yesterday's closing price for BRY and a premium of 23.1% to its one-month average price at that date,” they said.

The transaction is “$0.40 accretive to LINE in 2013 and is de-leveraging as it is effectively 100% financed by newly generated equity from Linn,” said Baird analysts, who said that “distribution and dividend increases of 6% and 8% at LINE and LNCO, respectively, could exacerbate a short squeeze.”

Mark E. Ellis, chairman, president and CEO, LINN Energy, commented: "Berry's assets are an excellent fit for LINN, and we believe this transaction generates significant accretion to our distributable cash flow per unit." 

Robert Heinemann, president and CEO, Berry Petroleum Co., said, "Today's merger announcement with LINN Energy marks the beginning of a new, important chapter in our company's history. Berry and LINN have demonstrated the ability to prudently grow their businesses while delivering value and returns to their respective shareholders and unitholders.”

Tax
In order to avoid immediate tax on LINN's acquisition of the Berry assets, LinnCo incurred a deferred tax liability. Because of the incremental costs for LinnCo resulting from this deferred tax liability, LINN has agreed to pay LinnCo $6 million per year for three years (2013, 2014 and 2015) or roughly $0.06 per LinnCo share. Due to the significant estimated shield provided by LINN to LinnCo, LinnCo's cash tax liability is estimated to be zero for the last two quarters of 2013. In future periods, assuming current estimates for taxable income and capital spending, management estimates that LinnCo's tax liability will be in the range of 2% — 5% of dividends paid, which is the same as the estimates provided in the prospectus for the LinnCo IPO.

Committees and advisors
In connection with approval of the contribution from LinnCo to LINN Energy, the boards of directors of each company formed a conflicts committee. To ensure the independence of each of the conflicts committees, two directors resigned from the LinnCo board of directors to serve on the LINN conflicts committee and two directors resigned from the LINN board of directors to serve on LinnCo's conflicts committee. In addition, in connection with the transaction, one representative of the board of directors of Berry will be appointed to the board of either LINN or LinnCo.

Citigroup Global Market Inc. acted as exclusive financial advisor to LinnCo, and provided a fairness opinion to the LinnCo board of directors; Latham & Watkins LLP acted as legal advisor to LINN Energy and LinnCo. Greenhill & Co., LLC provided a fairness opinion to the conflicts committee of the LINN Energy board of directors; Akin Gump Strauss Hauer & Feld LLP acted as legal advisor to the conflicts committee of the LINN Energy board of directors. Evercore Partners provided a fairness opinion to the conflicts committee of the LinnCo board of directors; Locke Lord LLP acted as legal advisor to the conflicts committee of the LinnCo board of directors. Credit Suisse Securities (USA) LLC acted as exclusive financial advisor to Berry Petroleum Co. and provided a fairness opinion to the Berry Petroleum board of directors. Wachtell, Lipton, Rosen & Katz acted as legal advisor to Berry Petroleum.

Shares of LINN Energy were up 2.21% mid-morning Thursday, while shares of LinnCO LLC were up 2.35%.

The transaction is subject to the approval of the shareholders of Berry and LinnCo and the unitholders of LINN Energy, as well as customary closing conditions. The transaction is expected to close by June 30, 2013. If approved, the combined company will be headquartered in Houston, Texas.

 

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