One business day after activist investor Carl Icahn kicked off his proxy fight to try to block SandRidge Energy Inc.'s pending $746 million purchase of Bonanza Creek Energy Inc., SandRidge's third-largest shareholder urged investors to join it and Icahn in voting against the deal.
Echoing Icahn Capital LP's logic, Fir Tree Partners' Dec. 18 letter to SandRidge's board said the company is paying too much for Bonanza, motivated by the same avid acquisition strategy that landed SandRidge in bankruptcy court in 2016. "The acquisition represents nonsensical empire building that echoes back to SandRidge's descent into bankruptcy when this same management team acquired disparate assets and added leverage and costs with reckless abandon," Fir Tree said.
In addition to paying too much for Bonanza, Fir Tree said, there are few synergies between the companies. Fir Tree said it owns 8.2% of SandRidge's outstanding stock. Icahn's family of funds owns just over 14%. According to S&P Global Market Intelligence data, the company's second-largest shareholder is Guggenheim Partners LLC, which has yet to say where it stands on the issue.
In his Dec. 15 solicitation for shareholder votes against issuing almost 20 million new shares to complete the deal, Icahn said SandRidge is paying at least $170 million more than Bonanza is worth while diluting the value of SandRidge's existing share, sucking all the cash out of SandRidge and adding debt.
"With zero net debt and approximately 200,000 acres and decades of remaining inventory to exploit, we believe SandRidge would better position itself by returning capital to its shareholders and growing production in a disciplined manner, not through pursuing this reckless transaction," Fir Tree said Dec. 18.
SandRidge said Bonanza will add 15.8 million barrels of oil equivalent per day (52% oil) to SandRidge's 38.8-MMboe/d volumes (27% oil) and allow it to expand into Colorado's DJ Basin while adding more acreage to its long-held leasehold in northern Oklahoma and southern Kansas' Mississippian Lime play.
In an updated December investor presentation firing back at Icahn, SandRidge said Icahn is comparing apples and oranges to arrive at his 75% premium. "Misleading reports of a 75% premium are based on deeply discounted valuation in connection with a rights offering, which in no way reflects the public market valuation immediately prior to the transaction."
SandRidge said it is getting Bonanza for a 17.4% premium over Bonanza's stock value when the deal was announced.
Icahn said SandRidge management is being driven to enlarging the company to justify pay that is well above the industry average. "Management has an incentive to support and seek out transactions, such as the proposed merger, that allow them to maintain their positions at a company with increased size, which may more easily justify the company's compensation practices, notwithstanding that such transactions are not in the best interests of the stockholders of the company," Icahn's Dec. 15 proxy solicitation said.
"Our [risk arbitrage] colleagues believe the biggest hurdle is approval from [SandRidge] shareholders, some of whom were surprised by the deal's scale/timing," Mizuho Securities USA analyst Tim Rezvan said Nov. 16. "Expect management to be in active dialogue with [SandRidge] shareholders in the days ahead and note attractive pro forma valuations support the acquisition."