Project Case Solution
Description of the restructuring deal
Memorial Resource Development Corp. is one of the leading and valuable independent Natural Gas and Oil Company, which is focused on acquisition, development and exploitation of NGL, natural gas and oil properties in North Louisiana.Whereas,the Range Resources Corporation is one the largest exploration firms,operating in Delaware, US, through subsidiaries in both Appalachian as well as the Southwestern regions of the country.
Range Resources Corp. announced the completion of the definitive merger agreement of the merger with its rival energy company “Memorial Resource Development Corp.” under all the outstanding shares of the common equity of MRD, it would be acquired in all stock-transaction valued at 4.2 billion dollars with the assumption of total debt of MRD. Under the merger’s agreement; the shareholders of MRD tend to get 0.375 shares of Range for each share held, and the implying value of a share was 15.75 dollars or the 17 percent premium to the MRD’s closing price on May 13. The transaction is valued 4.4 billion dollars when 1.1 billion dollars debt is included (Malik, 2016). The terms of the agreement also included that MRD would have the right to nominate the independent director to the board of Range. The terms of the agreement was unanimously approved by both the companies. The transaction was summed up by the chief executive of Range as combining two high-quality unconventional manufacturers with high-returns and large de-risked projects into one portfolio.(Anet Josline Pinto, 2016).Further details of the merger could be seen in the Appendix A.
Perceived value drivers of the proposed deal
There are number of reasons for the merger, as it pertains to generate synergies or strategic value for the investors. Following are the value drivers of the proposed deal:
Shareholder value creation
As a result of the outstanding performance followed by the merger between Range and MRD; the values are created for the shareholders as a result of the strong cash flows of the combined operations from strong asset base and all-the stock nature of the transaction. The shareholders are benefited from the combined assets. Also, the shareholders of MRD owned approximately 31 percent stake of the new entity.(Research, 2016).
Strong growth opportunities
The decision to buy MRD provided an advantage to the Range Resources Corporation related to growing demand from chemical manufacturers as well as natural gas exporters and being given an access to the assets in North Louisiana.(Releases, 2016). The acquisition also provided Range strategic positioning with growth opportunities in both Gulf Coats and Appalachian regions, with the added beneficial exposure to increase the demand of natural gas.
Marketing and Operational Synergies
The position of MRD gave a strong presence to Range in the Gulf Coat in advance of availability of additional transportation out of Appalachian. Additionally, the merger with MRD resulted in the opportunity of creating an improved as well as an expanded customer base in multiple and near demand areas.
The operating synergies of the merger is attributable to the combination of two companies, mainly with respect to the improved targeting and drilling techniques, operating expenses, market access and overhead expense. Another operational synergy is the reduction in the capital cost through leveraging the service provider relationships as well as reducing the completion and time consumed in drilling. Also, the overhead efficiency arose from the variance in the productive efficiency.
The transaction deal provided various financial benefits to the company in terms of reducing the risk and increasing the flexibility. The acquisition provided additional high quality assets to Range that competes on rates of return, with growing demand areas i.e. southeast and Gulf Coat and geographic diversity near seas only strong areas i.e. northeast. The company is also benefited from the pipeline contracts of Memorial, which enabled it to bring gas from the northwest down to the Gulf Coast, which is of paramount importance because the pipeline bottleneck in the northwest had gotten worst to the point that Range was realizing the sales prices of 66 percent below the market.(Helman, 2016).
Issues related to deal
The uncertainties related to the transaction deal could result in the loss of management personnel,which could adversely impact the future operations as well as the business of the combined companies. It is because the prospective and current employees of both the companies might experiencing certainty related to their role within the combined company, which might affect the ability of both MRD & Range in retaining or attracting the key personnel.
The debt of the combined company might limit its financial flexibility in a way that the combined company might incur additional debt in connection with financing of recapitalization, acquisition, operations etc. due to which the major proportion of combined company’s income would go into payment of debt obligations and then the combined company won’t be able to exploit thegrowth opportunities. Also, the ability of the combined company to raise additional debt, would be hindered by more restrictive covenants,increased cost and the vulnerability of combined company to adverse the industry, and the economic conditions would increase.
The long-term success of the merger is based on the ability to realize the anticipated benefits, such as: operational efficiencies’, innovation, cost savings etc. Furthermore, the future success of combined company depends on its ability to effectively manage the expanded business that tends to pose significant challenges associated to the monitoring and management of operations, complexity and increased cost. Also, any potential decline in the results of operations and financial conditions of the combined company might cause significant variations in its stock-price. (report, 2016).
Specific structural aspects of the deal
Among the three well-known methods of the merger and acquisition deal structuring;the merger between Range and MRD was all-stock deal,which was valued at $4.4 billion, including the assumption of $1.1 billion net debt of MRD. Range intended to acquire out of the outstanding common shares of MRD. Range merged with MRD for 0.375 shares of Range per MRD share and the implying value of a share was 15.75 dollars or the 17 percent premium to the MRD’s closing price.
Additionally, the company used commodity derivative financial instrument, such as: collar in order to lower the impact of the fluctuation in prices of natural oil and gas. The collar contract included the average monthly volume of $1100000 in 2016 and $1050000 in 2017.The weighted average price of floor was $4 in both the years, i.e. 2016 and 2017 and weighted average ceiling price was $4.71 in 2016 and $5.06 in 2017. Further details could be seen in the Appendix B………………………
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