Energy Merger Boom: Deals to Watch

NEW YORK ( TheStreet) - Energy and oil deals are dominating the M&A landscape as cash rich companies move to pounce while the timing is right.

Norwegian oil giant Statoil ( STO) has agreed to buy Brigham Exploration ( BEXP) for $36.50 in an all cash deal. The deal values Brigham at roughly $4.4 billion and is a more than 20% premium to its Friday close.

Brigham shares rose over 18% to $36 a share in pre-market trading.

The Austin, Texas -based company, founded by Ben "Bud" M. Brigham in 1990, has grown in recent years based on its oil and gas shale exploration focus in the in the Williston Basin of North Dakota and Montana. The shale formations are called the Bakken and Three Forks shale. The price paid is slightly below a $37.87 a share all time high it reached in March.

According to a press release announcing the deal, chief executive Brigham said, ""A bigger enterprise with a larger balance sheet will be better positioned to take advantage of our large and growing inventory of Williston Basin drilling locations and the associated assets." Statoil CEO Helge Lund said about the deal, "Entering the Bakken and Three Forks tight oil plays and taking on operatorship represents a new significant step for Statoil."

According to the company's website, it acquired its first drilling leases in the basin in 2005 with a 46,000 acre purchase. The company now has nearly 400,000 acres of leases in the basin and has drilled 38 wells.

The shale driller reported a profit of $42.9 million in 2010 on revenue of nearly $180 million after being loss making in the two previous years. In its latest quarter ended on June 30th, Brigham reported a net profit of $70.8 million on a company record production of12,206 barrels of oil a day. It also reported it spent nearly $325 million on exploration capital expenditure in the first 6 months of the year - and $362.2 million in cash and short-term investments on hand.

Brigham expects its production to multiply as high as 100,000 barrels of oil a day in five years, according to its press release. It also expects to drill 140 wells a year, making larger cash critical.

The merger has been approved by Brigham's board, which owns 2.5% of the company's shares and it expects to take the merger to shareholders for approval on October 31. According to the deal announcement, Brigham expects the merger to close at the end of 2011 or early 2012.

Brigham Exploration hired Jefferies ( JEF) to be its financial advisor on the merger. Goldman Sachs ( GS) and Tudor Pickering Holt acted as financial advisors to Statoil.

Kinder Morgan ( KMI) agreed to buy El Paso ( EP) for $21.1 billion in a cash and stock deal.

The transaction, which values El Paso at $38 billion including El Paso's outstanding debt creates the largest network of natural gas pipelines in the U.S. and is the largest energy merger this year.

It's also the second largest takeover this year after AT&T's ( T) $39 billion purchase of T-Mobile in March, although that deal has been blocked by the U.S. Department of Justice on antitrust concerns.

Kinder Morgan and El Paso announced the transaction in a news release Sunday.

The deal values El Paso shares at $26.87 each, a 37% premium to their closing price Friday of $19.59. It also represents the highest price for the company's stock since it went public in 2006.

Kinder Morgan will pay El Paso $14.65 a share in cash and will contribute its shares at a ratio of 0.41 and its warrants at a ratio of 0.64 to El Paso shares to assume all of its outstanding stock. The deal is expected to close in mid-2012 and will give Kinder Morgan shareholders a 68% ownership of the combined company; El Paso shareholders will own the remaining 32%.

El Paso shares rose more than 30% to $25.60 a share in pre-market trading.

"This once in a lifetime transaction is a win-win opportunity for both companies," Kinder Morgan founder and CEO Richard D. Kinder said in the news release. "The natural gas pipeline systems of the two companies are very complementary, as they primarily serve different supply sources and markets in the United States."

The combination will create the nation's largest natural gas pipeline and biggest independent transporter of petroleum.

It also will create the fourth largest energy company in the U.S., according to the news release.

As part of the merger, Kinder Morgan will sell El Paso's oil and gas exploration and production assets to help pay for the deal. It also expects the combination to boost shares immediately because of the cash flow of the combined companies.

Kinder Morgan also said it has a commitment from Barclays Capital ( BCS) to raise the nearly $15 billion in funds required for the cash portion of the purchase.

Both companies' boards have approved the merger and will be presenting it for shareholders votes in a special meeting in January 2012.

El Paso's largest shareholder is Icahn Capital Management, whose near $1 billion holding in the company shares makes it activist fund's third largest holding after Motorola Mobility ( MMI) and Motorola Solutions ( MSI).

In August, Motorola Mobility was sold to Google ( GOOG) for $12.5 billion -- a premium of more than 60%.

Kinder Morgan's largest shareholder is CEO Richard D. Kinder, who holds almost $6 billion worth of shares in the company he founded in 1997.

Goldman Sachs ( GS) is its second largest shareholder with more than $3.6 billion. The investment bank, along with The Carlyle Group's Riverstone fund, AIG Financial Products and an AIG-related hedge fund called Highstar Capital, took the pipeline giant private in 2006 at $107.50 a share.

In February, they did a public offering of the company in one of the largest public offerings of the year. Shares have fallen more than 13% since the IPO, and they closed Friday at $26.89.

El Paso was founded in 1928 by a Texas attorney named Paul Kayser.

When the transaction is finished, Kinder will remain chairman and CEO of the combined company, which will run under the Kinder Morgan name and be headquartered in Houston.

Two El Paso directors will also be nominated to Kinder Morgan's board. According to the press release, El Paso has agreed not to solicit competing bids and, if the merger fails, it will pay Kinder Morgan a $650 million termination fee.

Although Kinder Morgan will assume a significant amount of debt as a result of the merger, Kinder will first sell El Paso's exploration and production businesses for cash proceeds to Kinder Morgan that will lower debt levels needed to make the acquisition. In addition, it will sell El Paso's gas pipeline business to Kinder Morgan Energy Partners ( KMP) and El Paso Pipeline Partners ( EPB) over the next few years.

The remaining pipeline operations account for nearly 70% of El Paso's revenue, according to company filings. Previously, El Paso had planned to spin its exploration and production assets.

The company also said that El Paso's net operating loss carry-forwards will offset taxes associated with this sale. Kinder Morgan Energy Partners and El Paso Pipeline Partners are both expected to raise money through stock and debt sales to buy the exploration and production assets.

Kinder Morgan said it would expect to pay a dividend of $1.45 a share in 2012, a big increase from the $1.20-a-share dividend for 2011. The company also expects its dividend to grow 12.5% a year through 2015, an increase from its previously forecast 10% growth.

By the end of 2015, Kinder Morgan said it expects its assets to consist almost exclusively of its general partner interests in Kinder Morgan Energy Partners and El Paso Pipeline. At that point, significantly more than 80% of Kinder Morgan's cash flows are expected to come from the general partner interests in its pipeline businesses.

The merger is a boost to deal making markets, which have cooled significantly since the beginning of the summer.

According to quarterly numbers released by financial data firm Dealogic this month, global merger and acquisition activity fell 19% in the third quarter, the poorest performance of the year, after rising by more than 20% in each of the first two quarters of 2011.

After starting on its best merger pace since 2008, M&A is tracked at its worst level since the second quarter of 2010, making the risk of a double-dip in the deal market for 2011 a reality.

For banks relying on deals for fees, the slowdown has hurt earnings. On Thursday, JPMorgan ( JPM) reported that its investment banking fee revenue fell 46% to $1.04 billion, after growing 23% and 37% in the first and second quarters respectively when compared with 2010. It's currently the highest earning investment banking operation and seen as a harbinger for a slowdown in other investment bank earnings this quarter.

According to the New York Times, EMI's music publishing arm has drawn bids of $1.75 billion to $2 billion from Sony ( SNY) and BMG, a joint venture between KKR ( KKR) and German media conglomerate Bertelsmann. EMI's record label has drawn bids as high as $1.3 billion. Combined, the bids are below expectations of $4 billion for the EMI's businesses.

Other interested parties include industrial and media conglomerate Access Industries, as well as music industry giants Warner Music Group and Universal Music Group and buyout veteran Ronald Perelman. Up for auction by Citigroup ( C) are EMI's music label, which was expected to draw up to $1.5 billion and its music publishing arm, expected to raise as much as $2.5 billion after the bank seized the music-label, which owns rights to The Beatles music and was founded in 1931, from hedge fund Terra Firma in February. After repossessing EMI from Terra Firma and its founder Guy Hands, Citi it wrote off the $4.3 billion in financing it provided Hands to make the acquisition

The Times also reported that bids for the EMI in its entirety were below the combined $3.3 billion in bids Citi received for EMI's split assets.

-- Written by Antoine Gara in New York

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