Baytex, Raging River merger fails to stir buzz
The harsh investor reaction to Baytex Energy Corp.’s $2.8-billion merger with Raging River Exploration Inc. could put a chill on more consolidation in the Canadian oilpatch, analysts say. Baytex and Raging River announced an all-share deal on Monday worth $2.8 billion would create a stronger combined organization that is better able to develop its oil properties in Alberta and Texas, according to the companies. Part of the rationale for the deal was to create a corporation large enough to develop Raging River’s assets in the Duvernay, an emerging but expensive shale play in Alberta. In a press release, the two Calgary-based producers said the combined firm would produce over 100,000 barrels of oil and natural gas liquids this year.
“This is a rare opportunity where two companies complement each other so well that they have the potential to achieve something much greater than the sum of its parts,” Raging River CEO and chairman Neil Roszell said in a joint conference call announcing the deal. Baytex, which is issuing shares to finance the deal, indicated that it would pay down debt over time after the merger. “The new entity is well-positioned to pursue a blend of organic growth, debt reduction, strategic acquisitions and/or reinstate a dividend in the future,” Baytex president and CEO Ed LaFehr said.
The market and analysts reacted negatively to the deal. Raging River shares fell about 10 per cent to close at $5.65 Monday and Baytex fared even worse, as its shares dove about 12 per cent to $4.47.
“If you’re a Raging River shareholder, I’m not quite sure you’re enamoured by this transaction, especially the share price reaction,” Raymond James analyst Jeremy McCrea said, adding the deal worsened Raging River’s balance sheet. McCrea said he expects to see more mergers and acquisitions in the Canadian oilpatch this year, but market reaction to recent deals could give management pause. While analysts like the deal’s effect on Baytex’s debt to cash ratios, they are worried about dilution. Raging River investors will receive 1.36 common shares of Baytex for each share they own, the companies said Monday. RBC Dominion Securities analyst Greg Pardy believes the merger “is likely to make Baytex a more investable producer from an institutional standpoint,” but added, “this will come at a cost — in the form of an all equity deal, which dilutes our first cut (cash flow per share) estimate by 19 per cent.”