EQT Corp. investor Jana Partners LLC wants the producer to scrap its multi-billion dollar agreement to acquire Rice Energy Inc. and instead pursue the separation of its upstream and midstream businesses, which the hedge fund believes would create substantially more value for shareholders.
Jana founder Barry Rosenstein wrote in a letter to EQT's board of directors this week that the company's deal to buy Rice for $6.7 billion in cash and stock is too high a price to pay, saying the $2.5 billion of cost synergies that EQT expects from the merger would be eroded by the premium. EQT has touted the acquisition as a way to increase well returns, drill longer laterals and gain more operational efficiencies, among other things.
"...The stated benefits of the proposed Rice acquisition may appeal to EQT management, but offer no unique benefit to EQT shareholders. While the company claims that the transaction would differentiate EQT as a premier natural gas company with a consolidated footprint in the most economic basin, EQT was already the number one producer in Appalachia," Rosenstein wrote. "Likewise, while EQT would indeed become the country's largest natural gas producer, there is no unique value that accrues to shareholders generated simply by being the biggest."
Jana claims that the merger creates no real value as most of what EQT expects to gain from it could be accomplished on its own. In that sense, Rosenstein said investors could just buy shares in both companies to accomplish the same end.
"There is no unique science, technology, or know-how that would be obtained by acquiring Rice that could be applied by EQT to improve operations," Rosenstein said. "A Rice acquisition would result in EQT paying way more than the value of the transaction synergies, the majority of which are questionable or fall outside any common sense definition of synergies."
Combined, EQT and Rice produced more than 3 Bcf/d pro-forma in 1Q2017, enough to overtake ExxonMobil Corp. as the top producer in the country for the period, according to Natural Gas Supply Association data and NGI calculations. As part of the transaction, EQT also would obtain Rice's midstream properties. Those assets would be sold to EQT Midstream Partners LP in dropdown transactions.
Jana said separating the midstream and upstream segments into different businesses could create as much as $4.5 billion in shareholder value. Jana has a 5.8% stake in EQT. Rosenstein wrote that Jana's view has been seconded by its investment partners and he said the fund is prepared to nominate new board members that endorse it.
If the deal is completed in the fourth quarter, he added, a possible separation could be delayed by up to five years given the tax disadvantages the merger could create.
Rice has not commented about Jana's position, but EQT spokeswoman Natalie Cox said the company "seeks to maintain an open dialogue with investors and respects their opinions and perspectives.” She added that "with respect to the request to separate the production and midstream businesses, and as previously disclosed, EQT has acknowledged that there is a sum-of-the-parts discount and EQT management has committed to evaluating options and devising a plan to address this discount by the end of 2018."