Notable Mergers and Acquisitions 10/14: (EQM)/(EQT) (DK)/(ALJ) (MORN) (RSPP)

October 14, 2016 10:03 AM EDT

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*** EQT Midstream Partners, LP (NYSE: EQM) announced that it has acquired the Allegheny Valley Connector transmission and storage system, along with several Marcellus gathering systems from EQT Corporation (NYSE: EQT) for $275 million in cash. EQM funded the acquisition with borrowings from its revolving credit facility. The acquisition was effective October 1, 2016 and is expected to be immediately accretive to EQM’s distributable cash flow per unit.

The Allegheny Valley Connector (AVC) is regulated by the Federal Energy Regulatory Commission (FERC) and includes approximately 209 miles of transmission pipeline and 11 Bcf of working gas storage capacity. The AVC system has 450 MMcf per day of transmission capacity and is fully contracted for the winter season by Peoples Natural Gas, one of Pennsylvania’s largest natural gas distribution companies, through a firm reservation commitment that expires in 2034. EQM expects to invest approximately $50 million in AVC related growth projects during the remainder of 2016 and into 2017. The AVC is expected to generate Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) of $31 million in 2017, increasing to $35 million in 2018. The Non-GAAP Disclosures section of this news release provides important disclosures regarding projected net income and projected EBITDA.

The newly acquired gathering assets, consisting primarily of the Applegate, McIntosh, and Terra systems in Pennsylvania; and the Taurus system in West Virginia, include 87 miles of gathering pipeline, an estimated 7,000 hp of compression, and provide 370 MMcf per day of gathering capacity. EQT has committed to a total of 235 MMcf per day of firm capacity under a 10-year contract on the systems. EQM expects to invest approximately $105 million over the next several years to complete planned expansion projects, including the installation of approximately 20 miles of gathering pipeline and four compressor units with 20,000 hp of compression. Upon completion of the expansion projects, EQT’s total firm capacity will increase to 365 MMcf per day. The gathering systems are expected to generate EBITDA of $16 million in 2017, increasing to $30 million in 2018.

*** Delek US Holdings (NYSE: DK) disclosed the following letter in an SEC filing on Friday morning:


October 14, 2016
David Wiessman
on behalf of the Special Committee of Alon USA Energy, Inc.
12700 Park Central Dr., Suite 1600
Dallas, TX 75251

Dear David:

I am writing on behalf of Delek US Holdings, Inc. to propose a business combination of Delek and Alon USA Energy, Inc. (“Alon”). Under our proposal, Delek (or a subsidiary of Delek) would acquire each outstanding share of Alon common stock which Delek does not already own in an all-stock transaction at a fixed exchange ratio of 0.44 Delek shares for each outstanding Alon share. We believe both companies are currently undervalued to differing extents by the market, and our proposal reflects, in the context of the current and prospective challenges facing Delek’s and Alon’s sector, our view of the relative fundamental values of Alon and Delek; each company’s respective outlook and balance sheet profile; and potential synergies for the transaction. We believe this combination would create significant value for the respective stockholders of Delek and Alon in both the near- and long-term, and the 100% equity consideration would allow Alon stockholders, many of whom are also currently Delek stockholders, the opportunity to fully participate in that value creation as it is realized.

This proposal supports the shared mission of Delek and Alon of optimizing and growing stable cash flows from an integrated portfolio of refining, logistics and retail assets. For its part, Delek has taken a number of steps to strengthen its financial position, most recently announcing a definitive agreement to sell our retail subsidiary, which transaction is expected to meaningfully enhance our financial flexibility. A combination with Delek would allow Alon stockholders to take part in a formidable combined company to weather the current downturn in the industry and emerge in a position of substantial strength as margins improve. When taken together, these factors collectively position a combined company to be a peer-leading enterprise in the refinery space for the long-term.

Our board of directors has authorized management to engage in negotiations and the making of this proposal. Delek has engaged Tudor, Pickering, Holt & Co. and Norton Rose Fulbright US LLP as our financial and legal advisors, respectively. Given the all-stock nature of the transaction, our proposal would not be subject to any financing contingency. This proposal does not constitute a legal offer or a binding agreement between us. Such an agreement, if any, would be subject to completion of mutual, customary due diligence for a transaction of this nature and negotiation of definitive transaction documents, the terms and conditions of which would have to be approved by the boards of directors of both Alon and Delek. We will not move forward with the transaction unless the transaction is approved by a special committee of the board of directors of Alon that is comprised entirely of directors that are independent of Delek. In addition, the transaction would be subject to a non-waivable condition requiring the approval of the transaction by the holders of a majority of the shares of Alon not owned by Delek or its affiliates. If the special committee of the board of directors of Alon does not recommend, or the public stockholders of Alon do not approve, the proposed transaction, such determination would not adversely affect our future relationship with Alon. We also expect that our proposal would require approval from Delek stockholders to authorize the issuance of the required shares to close the transaction. Please be aware that this proposal is an expression of interest only, and we reserve the right to withdraw or modify our proposal at any time and for any purpose.

We believe our proposal presents a compelling opportunity for Alon’s stockholders and look forward to your response. I am personally committed to overseeing the successful integration of the companies into a single enterprise, and I and the rest of our senior management team are available at your convenience to discuss any aspect of our proposed transaction.

Sincerely,

/s/ Ezra Uzi Yemin
Ezra Uzi Yemin
Chairman and CEO of Delek US Holdings, Inc.

*** Morningstar, Inc. (asdaq: MORN) announced that it has entered into a definitive agreement to acquire PitchBook Data, Inc. PitchBook, founded in 2007, delivers data, research, and technology covering the breadth of the private capital markets, including venture capital, private equity, and mergers and acquisitions (M&A). PitchBook will maintain its brand and identity and will continue to be led by founder and chief executive officer John Gabbert.

Morningstar was an early investor in PitchBook and currently owns approximately 20 percent of the company. The company expects to pay approximately $180 million (subject to working capital adjustments) for the remaining ownership interest in a transaction that values PitchBook at $225.0 million.

Morningstar President Kunal Kapoor, who has served on the board of directors for PitchBook since 2012 and will become chief executive officer of Morningstar effective Jan. 1, 2017, said, "Both Morningstar and PitchBook share the goal of bringing transparency to the investment landscape, and PitchBook is in a great position to continue its strong growth trajectory as private markets and private companies are areas of rapidly growing investor interest. Data has always been Morningstar's sweet spot, and we look forward to working with PitchBook to help investors and advisors better understand and navigate this evolving area of the market. Over time, we plan to add some of Morningstar's proprietary research capabilities to this dataset, and we also see meaningful opportunities to expand the business globally."

"I reached out to Morningstar as a potential investor seven years ago because I admired the company's entrepreneurial spirit and innovative products," Gabbert said. "Joining forces with Morningstar will help us enter into our next stage of growth, including developing the next-generation version of our award-winning data and software platform, investing in our world-class sales and customer support functions, and expanding our business in Europe and Asia. As investors increasingly broaden their horizons beyond traditional public markets and investments, the multi-asset capabilities Morningstar is building will become even more valuable."

Data on private capital markets is difficult to find and often in non-standard formats, and PitchBook has built a leading market position with its comprehensive private market datasets and robust research process. PitchBook's client count has more than tripled over the past three years (to more than 1,800), and sales bookings have grown by a compound annual growth rate of more than 70 percent for the five years ended Dec. 31, 2015. The company's PitchBook Platform and best-in-class user interface make it easy for clients to access data, discover new connections, and conduct research on potential investment opportunities. PitchBook covers the full lifecycle of venture capital, private equity and M&A, including the limited partners, investment funds, and service providers involved. With the acquisition of PitchBook, Morningstar will be able to apply its core data and software capabilities to a new client segment: private and institutional investors.

Based in Seattle, PitchBook had $31.1 million in revenue for the trailing 12 months ended June 30, 2016. The company has more than 300 employees located in Seattle, New York, and London. Morningstar originally invested $1.2 million in PitchBook as a Series A Preferred investor in September 2009 and another $10.0 million as a Series B Preferred investor in January 2016. Subject to customary closing conditions, the two companies expect the transaction to close in the fourth quarter of 2016.

*** RSP Permian, Inc. (NYSE: RSPP) announced it has entered into definitive agreements to acquire Silver Hill Energy Partners, LLC ("SHEP I") and Silver Hill E&P II, LLC for $1.25 billion of cash and 31.0 million shares of RSP common stock ("RSP Shares") in aggregate, implying a total purchase price of approximately $2.4 billion (based on the 20-day volume weighted average price of RSP Shares as of October 12, 2016).

Silver Hill is comprised of two privately held entities controlled by affiliates of Kayne Anderson Capital Advisors, LP ("Kayne Anderson") and Ridgemont Equity Partners ("Ridgemont") that collectively own ~68,000 gross / ~41,000 net acres in northeast Loving and northwest Winkler Counties, Texas with ~15 MBoe/d of current net production from 58 producing wells (49 horizontals) and ~3,200 gross / ~1,950 net total undeveloped locations.

While both transactions will have an effective date of November 1, 2016, the two transactions will close separately. SHEP I is expected to close in the fourth quarter of 2016, with Silver Hill receiving approximately $604 million of cash and 15.0 million RSP Shares. SHEP II is expected to close in the first quarter of 2017, with Silver Hill receiving approximately $646 million of cash and 16.0 million RSP Shares. Both transactions are subject to certain closing conditions, customary purchase price adjustments, and regulatory and third party approvals.

Upon closing of SHEP II, Kayne Anderson, Ridgemont and other Silver Hill shareholders are expected to collectively own approximately 20% of RSP's outstanding shares pro forma for the issuance to Silver Hill and the concurrent equity offering that will fund a portion of the consideration for the acquisition. In addition, RSP expects to add Kyle D. Miller, CEO of Silver Hill, to RSP's Board of Directors upon closing SHEP II.

RSP has provided an operational update including (i) 3Q 2016 production, (ii) an increase to 2016 guidance and (iii) preliminary 2017 operating plans and outlook.

Transaction Highlights

  • Unparalleled opportunity to unite two premier, growth-focused companies in the Permian Basin with complementary asset bases
  • Combination is accretive to RSP on a cash flow, production and net asset value basis
  • The acquisition creates substantial scale with combined current production of approximately 50 MBoe/d, over 100,000 net surface acres, over 500,000 net effective horizontal acres and over 3,600 net drilling locations with substantial additional upside from tighter spacing assumptions
  • Unique acquisition of a highly contiguous acreage position in the core of the Delaware Basin that has approximately 68,000 gross / 41,000 net surface acres located in Loving and Winkler counties
    • Acreage located in the thickest, deepest part of the Delaware Basin, which is significantly over-pressured
    • Blocked up acreage configuration conducive for longer laterals and efficient development
    • Located in an oil-weighted area of the Delaware Basin
    • ~250,000 net effective horizontal acres across 7 horizontal pay zones
    • Significant operational control with over 80% of acreage operated
    • Average working interest in operated properties of approximately 83%
    • One operated rig holds acreage position
    • Offset operators include EOG, Anadarko, Shell, Matador and Devon
    • Meaningful and growing production base with current net production of approximately 15.0 MBoe/d (69% oil, 86% liquids) and two operated horizontal rigs currently drilling on acreage position
  • Deep inventory of attractive horizontal drilling locations across multiple horizontal stacked pay zones, including the Wolfcamp B, upper and lower Wolfcamp A, 3rd Bone Spring, 2nd Bone Spring, Avalon, and Brushy Canyon
    • EURs of ~1.0 MMBoe common across acreage position based on management's estimates
    • ~3,200 gross / ~1,950 net locations with average lateral length of approximately 6,300'
      • Acreage trades on-going for longer lateral development
  • Ability to leverage RSP's efficient, low-cost operating capabilities and technical knowledge of multi-zone, horizontal development and apply to early and evolving drilling and completion techniques in the Delaware Basin

Steve Gray, CEO of RSP, stated, "We are extremely pleased to announce a strategic combination with Silver Hill. This transaction creates a compelling growth platform with the highest quality assets in the core of both the Midland and Delaware Basins that each exhibit strong returns and have substantial combined upside. The Silver Hill team has done an incredible job of demonstrating the vast potential of the asset base with strong results across multiple horizontal zones." Mr. Gray continued, "We have been patient in our M&A efforts to ensure that we pursue accretive opportunities for our shareholders that enhance our already deep inventory of high-return horizontal locations. We believe the assets of Silver Hill are located in the best part of the Delaware Basin and will be a perfect complement to our existing asset base. The returns on Silver Hill's horizontal wells compare favorably with our Midland Basin assets and generally rank in the top quartile of our drilling inventory. We also appreciate the confidence the owners of Silver Hill have in the RSP team, taking a significant portion of their consideration in RSP stock. We look forward to our new relationship with Kayne Anderson, Ridgemont and the other Silver Hill owners."

Kyle D. Miller, CEO of Silver Hill, stated, "Silver Hill has assembled one of the largest and most attractive privately-owned acreage positions in the core of the Delaware Basin. This transaction provides our owners with near-term liquidity and continued upside exposure to these premier assets through our significant equity ownership in RSP. We have long-standing relationships with the RSP management team and recognize the significant value they have created for investors through their technical leadership, efficient operations and adherence to a focused strategy. We believe RSP is the perfect fit for Silver Hill given their excellent track record, their superior assets in the Midland Basin and their experienced management team."

Transaction Financing

The Company intends to finance the cash portions of the SHEP I and SHEP II transactions through potential capital market transactions, which may include equity or debt offerings prior to the closing of each transaction. The Company anticipates that the financing transactions will be leverage neutral or result in lower leverage metrics on a forward-looking and pro forma basis.

Advisors

RBC Capital Markets acted as lead M&A advisor to RSP and provided fairness opinions to RSP's Board of Directors on the SHEP I and SHEP II transactions and Barclays Capital Inc. acted as a co-M&A advisor on the transactions. Vinson & Elkins L.L.P. served as legal counsel to RSP. Jefferies LLC acted as financial advisor to Silver Hill and Thompson & Knight LLP and DLA Piper LLP served as legal counsel.

To keep up on all the Mergers & Acquisitions data in real-time, go to our M&A Insider page.



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