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Midstates/SandRidge deal features activist hedge fund on both sides

Midstates Petroleum Co. Inc.'s Feb. 6 public bid to buy fellow Midcontinent oil and gas producer SandRidge Energy Inc. for roughly $564 million in stock has the backing of an activist investor that owns stakes in both sides of the proposed deal.

Midstates said the offer has the support of activist hedge funds Fir Tree Partners and Avenue Capital Group LLC, which together own 40% of Midstates. Fir Tree also owns 13% of SandRidge's shares.

Fir Tree teamed up with billionaire shareholder activist Carl Icahn to block a December merger of SandRidge and Colorado shale oil and gas producer Bonanza Creek Energy Inc.

In a Feb. 6 letter to SandRidge's board, Midstates Chairman Alan Carr said his company's CEO, David Sambrooks, reached out to SandRidge CEO James Bennett to propose a combination of the two companies Jan. 18.

SandRidge had no immediate reaction to Midstate's suddenly public proposal Feb. 6.

Icahn, SandRidge's largest shareholder, with a 14% stake, made no secret of his displeasure with Bennett's tenure. Icahn claimed Bennett wanted the Bonanza Creek deal only to boost his paycheck.

Under the terms of Midstates' proposal, Sambrooks would become the CEO of the combined company. "The role of overlapping large holders in both entities suggests this is an effort to put SandRidge's assets into Midstates' hands, which implies SandRidge's management and board would be unlikely to survive the merger," Mizuho Americas LLC analyst Tim Rezvan said after the deal was announced.

If the deal closes in the second quarter, as Midstates proposes, SandRidge shareholders would own roughly 60% of the new company, Midstates said.

"Following the unsuccessful effort to acquire Bonanza Creek, we believed management had a tough road ahead of them with activist investors who did not like expected FCF [free cash flow] deficits and leverage increase from that merger," Rezvan said, "Today's language from Midstates highlighted FCF generation, which may resonate with SD's shareholder base."

Shares in SandRidge spiked 5% to just over $17.50 shortly after the opening bell Feb. 6.

Midstates said the deal would create a $1 billion Midcontinent producer focused on Oklahoma's Mississippian Lime and northwest STACK shale plays. Midstates said it could generate $400 million in free cash from the combined plays over the next five years while benefiting from $70 million in synergies because of the overlap of Oklahoma operations, while carrying no debt. Pro forma, the two companies had 53,600 barrels of oil equivalent per day in oil and gas production, about 50% gas with the rest NGLs and crude, Midstates said.

"The pro forma entity would have a market cap of ~$977 million, which should increase liquidity, but the quality of the Oklahoma assets remains a concern," Rezvan said. "A presentation released by Midstates highlights enhanced completion and refrac opportunities in the play. We see asset quality as a deterrent to investors, regardless of FCF generation, but expect [Midstates] management to make their case in the days ahead."

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