Shares of Linn Energy LLC and LinnCo LLC took a tumble Tuesday after the companies disclosed that the Securities and Exchange Commission (SEC) was looking into details of LinnCo’s planned merger with Berry Petroleum Co.
Linn shares closed down nearly 19% Tuesday at $27.04 after hitting a new 52-week low of $26.78. LinnCo was off more than 16%, closing at $30.90 after hitting a new 52-week low of $30.25. Berry Petroleum shares lost nearly 6%, closing at $39.85 after rebounding from an intraday low of $38.45
Linn and LinnCo said the SEC’s Fort Worth, TX, office had begun a private inquiry involving the companies and had requested the preservation of documents and communications potentially relevant to, among other things, LinnCo’s proposed merger with Berry (see Daily GPI, Feb. 22) and Linn and LinnCo’s use of non-GAAP financial measures and hedging strategy.
At the time it was announced, the Linn-Berry deal was touted as the first-ever acquisition of a public C-Corp. by an upstream LLC or MLP.
“While it’s always nice to be a pioneer, in theory, given the glory and honor bestowed upon a successful deal, behind the scenes there are many issues that have likely never been dealt with before, both from a company and regulatory perspective, that take time to sort out,” Wunderlich Securities said in a note. “The fact this deal has taken longer than expected is not a surprise, nor a concern, to us.”
The $4.3 billion tie-up of Linn Energy and its LinnCo unit with Berry would create one of the largest exploration and production (E&P) companies in North America. The companies said Berry’s “long-life, low-decline, mature assets are an excellent fit for an MLP/LLC” and will bring “meaningful growth” to Linn’s portfolio, adding a geographic presence in California, the Permian Basin, East Texas and the Rockies, as well as a new core area in the Uinta Basin.
Linn and LinnCo said they are cooperating with the SEC. “Although the impact of the inquiry on the timing of LinnCo’s proposed merger with Berry Petroleum Co. is difficult to predict, LinnCo and Linn remain committed to the completion of the transaction,” the companies said.
“[Berry] shares are now trading basically at a price similar to when the deal was announced (under $39/share) due to the uncertainty that continues to float around the deal,” Wunderlich said. “At this point, we feel that the shares provide a pretty strong risk-reward profile; if the deal falls through, it shouldn’t get hit much, and if it goes through as planned currently, it would move over $40/share, providing a nice short-term return.
“We feel all three parties still want to get this deal done and behind them and that the SEC issues can be worked through and a shareholder vote can also be worked out. While delays and black clouds do exist, we feel these are opportunities for investors looking for ample return in a short period.”
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