Deal Reporter
Rosetta Resources (NASDAQ:ROSE) held discreet discussions with fewer than five parties before agreeing to a deal with Noble Energy (NYSE:NBL), a source familiar with the situation said.
The Houston-based energy group reached out to the most logical suitors with stronger financial profiles six to eight weeks ago to assess their interest and explore the kinds of strategic alternatives that would be possible with commodity prices depressed, the source said.
On Monday Energy announced plans to acquire Rosetta Resources, an E&P company focused on the Eagle Ford and Permian Basin, in an all-stock transaction valued at USD 2.1bn, plus the assumption of USD 1.8bn in net debt.
The source familiar said that over the past one-and-a-half weeks conversations about a possible transaction intensified with two parties including Noble. The source declined to name the other suitors.
No financial sponsors or sponsor-backed strategics were talked to. The source described companies that showed interest in Rosetta as being “much larger investment grade companies”.
For Rosetta, the source familiar said, the impetus to seek alternatives was to ascertain how the company could accelerate its drilling plan in the event commodity prices started to rise.
With an investment grade company like Noble, Rosetta will be better equipped to execute on its growth plan, and therefore, a stock deal was an important consideration for the target. A high grade company would help Rosetta “draw capital fast” to build its asset base, the source explained.
A stock deal is the way for a seller to retain the upside of its proved undeveloped reserves (PUDs), since in this commodity price environment, buyers want to pay for proved-developed-producing (PDP) reserves, but are less willing to pay for PUDs, said an industry banker.
A seller like Rosetta - and its shareholders - will potentially get more out of a deal if the buyer's balance sheet is put to work post-acquisition turning the PUDs into PDPs, rather than paying cash to the seller, the same banker explained. However, because the buyer and seller will be sharing in the upside of both parties' assets, the quality of both sets of assets is important.
Rosetta's liquids-rich asset base includes approximately 50,000 net acres in the Eagle Ford Shale and 56,000 net acres in the Permian. Noble Energy has identified in excess of 1,800 gross horizontal drilling locations for development, providing net unrisked resource potential of approximately one billion barrels of oil equivalent, the company said in a release.
Rosetta's assets produced 66,000 barrels of oil equivalent per day in 1Q15, and year-end 2014 proved reserves were 282m barrels of oil equivalent. More than 60% of Rosetta's current production and proved reserves are liquids, the release added.
The source said chances of an interloper emerging is quite low given the premium and the board’s preference for an all-stock deal. The industry banker agreed that a rival bid was unlikely given this structure.
Under the agreement, Rosetta shareholders will receive 0.542 of a share of Noble Energy stock for each share of Rosetta stock held. Based on the Noble Energy closing price on 8 May, the transaction has an implied value to Rosetta shareholders of USD 26.62 per share. Noble declined 6% on the announcement on Monday.
The source said the merger agreement will be filed within a couple of days and the proxy will be filed over next couple of weeks. The transaction is expected to close in 3Q15.
Petrie Partners Securities acted as exclusive financial advisor to Noble Energy. Skadden, Arps, Slate, Meagher & Flom, LLP acted as legal advisor to Noble Energy. Morgan Stanley acted as exclusive financial advisor to Rosetta. Latham & Watkins LLP acted as legal advisor to Rosetta.