Hedge fund JANA Partners LLC made good on its promise to wage a proxy battle to halt the pending merger of Appalachian shale gas drillers EQT Corp. and Rice Energy Inc., asking Oct. 16 for shareholders to vote against the deal at a Nov. 9 special meeting in Pittsburgh.
JANA's proxy repeated its problems with the deal: The lease purchases are not adjoining, requiring EQT to spend $1 billion more to fill the spaces between EQT and Rice leases; the predicted $10 billion in synergies will not appear; and EQT's managers may have a "perverse" incentive to complete the deal because the increased production from the merger could boost their pay.
JANA, which owns 5.9% of EQT's stock, thinks shareholders would gain more from splitting EQT into upstream and midstream companies and taking a pass on Rice.
"EQT's stock has for years traded at a large discount to EQT's sum of the parts value," JANA's proxy said. "EQT management has promised to address this sum of the parts discount by the first quarter of 2018, but by issuing a substantial amount of still-discounted EQT stock to Rice stockholders, EQT would be massively diluting the value to EQT stockholders of any step EQT takes in the future to erase EQT's sum of the parts discount."
"Only you can stop this massive destruction of value," JANA managing partner Barry Rosenstein said in the proxy. "You can send EQT a message: Stop this value-destroying acquisition, and start pursuing maximum value creation for all EQT stockholders."
Specifically, EQT shareholders will be voting on whether to issue millions of shares of new stock that will pay for all of Rice's stock at a ratio of 0.37 EQT share plus $5.30 in cash for each Rice share. Based on Oct. 13 closing prices, Rice shares are still discounting the implied value for the deal ? closing at $27.52 versus a deal value of $28.61 ? indicating there may still be some doubt about the deal transpiring.
EQT on Oct. 16 reiterated what it has said all along: Buying Rice gives it access to data and leasehold that will let EQT drill longer laterals and produce cheaper gas.
"While we welcome JANA's views and a discussion regarding a potential separation, it is unfortunate that JANA is now using misinformation about the pending transaction in an attempt to mislead shareholders," EQT said Oct. 2 and again Oct. 16. "Most industry analysts agree with our management and board that this transaction is an outstanding strategic and operational fit that will create significant value for EQT shareholders in the near- and long-term."
"EQT has been operating in the Appalachian Basin for nearly 130 years and has spud more than 2,500 horizontal wells," EQT said. "JANA's claims, based on information from unnamed experts, simply demonstrate their lack of understanding regarding the specialized techniques and nuances needed to operate in this region."
A number of Wall Street analysts think JANA's effort to block the purchase of Rice is destined to fail.
"Last night EQT announced several key initiatives to address concerns around the Rice acquisition," analysts at energy investment bank Tudor Pickering Holt & Co. said. "First, the company has expedited the timeline of formulating a plan to address the [sum-of-parts] discount from YE'18 to the end of Q1'18, with the decision to be made by a special committee composed of independent directors."
Tudor Pickering Holt also took issue with JANA's characterization of incentive pay for EQT executives. "EQT reiterated prior intent to exclude acquired [Rice] volumes from the long-term incentive plan; 2018 compensation will now be based on operating and development cost improvement, relative total shareholder return, and [return on capital employed]," the analysts said.
"While we've seen a generally positive response to the [Rice] transaction, the announced initiatives should help ease any remaining concerns," Tudor Pickering Holt continued. "In our view, the next steps likely include a midstream consolidation and eventually a tax-free spinoff to shareholders, which should work to unlock significant value from the enterprise. EQT remains our top gas pick and we would expect outperformance today given the expedited and revised compensation structure."