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The Deal: Trading Berry Petroleum's Puzzling $2.9 Billion Merger with LinnCo

NEW YORK ( TheDeal) -- Shares of Berry Petroleum Co. trade at an uncommonly wide spread to its $2.9 billion merger with LinnCo LLC and affiliate Linn Energy LLC, but is there a way to trade it?

Berry Petroleum entered a stock swap Dec. 20 with LinnCo for 1.25 of a LinnCo share for each share of Berry. Berry is an oil and gas exploration and development company with assets from California to Texas. LinnCo is a limited partnership holding units of Linn, which develops oil and gas properties.

The companies expect the deal could close by the end of June. The registration statement for the units to be issued in the merger was filed March 22.

Shares of Berry Petroelum were gaining 0.6% to $48.18 while LinnCo was falling 15 to $42.08.

The deal requires the approval of shareholders of Berry, LinnCo and Linn. Some arbs following the transaction do not see any issues with it closing. The merger does require the approval of the Federal Energy Regulatory Commission. Berry has electric generation in California that powers its own operations, but the company also sells energy to utilities and so FERC has to approve the change of control.

The deal spread has been wide since the transaction was announced because LinnCo units cannot be readily borrowed for short sales. As a consequence, risk arbitrageurs cannot easily hedge the deal to capture the spread.

Also, since LinnCo is an LP, funds holding the shares on the deal close face a tax difficulty because their investors become liable for individual taxes related to the LinnCo units. So funds would shy away from owning LinnCo, but if the deal can be traded they could hold a position until shortly before the close and unwind it prior to actually owning LinnCo.

If LinnCo could be shorted, another issue is the relatively high dividend LinnCo pays: about 73 cents a quarter.

When the Berry deal spread was $2 and change following the deal announcement, this all seemed academic. But in recent weeks, the spread has grown wider. In recent days Berry has traded at a spread of about $5.20, without regard for the LinnCo dividend, to the value of the stock swap.
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