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Plenty of work for laywers from the top mergers and acquisitions of 2018

December 28, 2018

Most mergers and acquisitions are aimed at increasing scale so companies can win a bigger chunk of their industry market.

That proved true in 2018, but many companies struck deals for other reasons: some to simplify their corporate structures; others to diversify their product mix or geographic reach; and still others for cash to pay down debt, boost shareholder return and plow money into lucrative prospects.

The deals, not surprisingly, mostly came from the oil and gas sector, from upstream to midstream to downstream. But consumer products, utilities and entertainment also shared the stage. We consulted with top M&A lawyers in the state for their takes on the most significant deals of the year. We added our own insights along with data from Mergermarket, and herewith is The Texas Lawbook’s consensus list:

1. $62 billion blockbuster

No doubt, Energy Transfer Equity’s acquisition of affiliate Energy Transfer Partners, which closed in November, was a blockbuster involving $27 billion in stock and $35 billion in debt assumption to create a $90 billion energy infrastructure giant.

But the deal also was a continuation of those so-called “simplifications” in which related midstream master limited partnerships merge to streamline structure and eliminate incentive distribution rights for some unitholders, which didn’t always please investors.

Tudor, Pickering, Holt said the long-awaited collapse of the limited partner/general partner structure of the Energy Transfer entities and the elimination of associated incentive distribution rights should “assuage investor concerns.”

2. Big refining buy

The refining industry has consolidated over recent years, creating larger and larger companies. And Findlay, Ohio-based Marathon Petroleum Corp. crowned itself king with its $31.3 billion purchase of Andeavor Corp., which made it the largest refiner in the U.S. in terms of capacity. Andeavor was formerly known as Tesoro Corp.

Analysts at Jefferies applauded the strategy of scaling operations and reducing inefficiencies, saying the deal would create a coast-to-coast network and one of the largest fuel distributors in North America.

3. Hot drinks with cold drinks

As part of its desire to expand beyond coffee, New England-based Keurig Green Mountain announced in January that it was picking up Dr Pepper Snapple for $23 billion, creating the world’s third-biggest beverage company with $11 billion in sales.

Analysts said the transaction — which closed in July — not only helps the companies cut expenses, it sets up better distribution channels for both, giving them a shot to better compete with goliaths Coca-Cola Co. and PepsiCo.

“Combined, the new company could have margins exceeding 30 percent by 2020, making them the industry leader and the only beverage company that manufactures cold and hot beverages,” S&P Global credit analysts Diane Shand and Chris Johnson said in a report.

4. Offshore combination

M&A typically happens in the beginning stages of an industry recovery. Then the offshore drilling sector must be on its way, with Ensco’s $2.3 billion purchase of Houston-based Rowan Cos. that was announced in October.

The transaction came just a year after Ensco picked up Atwood Oceanics for $863 million.

The all-stock deal — which is expected to close in the first half of 2019 — creates the largest offshore driller in the industry with an enterprise value of $12 billion.

Analysts at Tudor Pickering Holt called the deal a “beautiful combination” from a strategic perspective, with Rowan gaining immediate scale and breadth in the ultradeep-water market and significant contract backlog while Ensco regains its position as a top global jack-up player.

5. Deal for Permian acreage

As oil prices moved upward earlier in the year, so did a wave of mergers between oil and gas explorers and producers. Concho Resources’ $9.5 billion purchase of RSP Permian announced in March was the first big one out of the gate.

The combination, which closed in July, was also was the largest M&A deal in the history of the Permian Basin in West Texas and New Mexico — and created the largest unconventional shale producer in the region.

Williams Capital Group analyst Gabriele Sorbara said the transaction made sense for Concho, expanding its Permian Basin position with contiguous core acreage that added $2 billion in synergies.

6. Utility expands its range

Houston natural gas utility CenterPoint Energy jumped across state lines as part of a continuing consolidation of its sector, agreeing to pick up Indiana natural gas utility Vectren in April for $6 billion.

The combination, which is expected to close early next year, will have more than 7 million customers in eight states with $29 billion in assets and $27 billion in enterprise value.

Williams Capital Group analyst Chris Ellinghaus said Vectren makes sense for CenterPoint as a replacement for the midstream assets it spun off and for the utility’s geographic diversity, with a reasonable premium that’s less than some for other deals in recent memory.

7. Cross-border buyout

Canadian oil and gas giant Encana reached across a national border in November when it announced it would pick up The Woodlands-based Newfield Exploration Co. for $7.7 billion.

The deal — which was the third billion-dollar-plus oil and gas merger announced that week — will expand Encana’s access to the United States’ prolific oil and gas basins, including the Permian and Oklahoma’s Stack/Scoop play in the Anadarko Basin.

“We believe this combination is very favorable to the buyer, as the deal provides a core position in the Stack/Scoop play at an attractive valuation,” Williams Capital analyst Garbriele Sorbara said.

8. A giant in television

Second time was the charm for Nexstar, which agreed in early December to buy TV station owner Tribune Media for $6.4 billion.

The transaction will make Irving-based Nexstar the nation’s largest TV station owner with 216 stations in 118 markets.

“We think this is a transformative deal for Nexstar that should greatly increase its scale on financially attractive terms,” RBC Capital Markets analyst Leo Kulp wrote in a note.

Nexstar initially bid for Tribune Media in May 2017, but Sinclair Broadcast Group ended up winning the auction with an offer of $3.9 billion. Potential regulatory problems with the deal triggered a relaunch of the process by Tribune, and Nexstar came in with the winning bid.

9. A seller becomes a buyer

Oklahoma oil and gas producer Chesapeake Energy Corp. surprised industry observers when it announced its $4 billion purchase of WildHorse Resource Development Corp. in October.

The reason? Chesapeake had lately been more of a seller than a buyer of assets, having struggled over the last several years with a heavy debt load accumulated from a land grab by late CEO Aubrey McClendon.

The company also had a heavy focus on natural gas, whose prices have been depressed for years given high supply from new discoveries around the U.S.

But Chesapeake had worked to turn the situation around, including eliminating $12.2 billion in debt, reducing capital expenditures by $12 billion, removing $1 billion in capital costs, and erasing $10.3 billion in midstream and downstream commitments.

So, the seller became a buyer. The purchase of WildHorse will double Chesapeake’s oil production to 30 percent when it is completed, which is expected in the first half of next year.

10. Surprising energy deal

Another surprise deal in 2018 was Global Infrastructure Partners’ $3.1 billion purchase in June of all of Devon Energy’s interests in publicly traded entities EnLink Midstream Partners and EnLink Midstream.

Tudor, Pickering, Holt was startled that Oklahoma-based Devon unloaded its entire EnLink position. But analysts there said the sale would raise a material amount of cash to buy back stock at a deep discount to intrinsic value.

Indeed, Devon said it planned to use the proceeds to boost the size of its stock repurchase program by $3 billion to $4 billion, or about 20 percent of its shares outstanding.

The purchase gave GIP about 64 percent of EnLink Midstream and 23 percent of EnLink Midstream Partners. Four months later, the two announced they were combining in a $13 billion deal.

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