Inside the Board Rooms of a $5.4 Billion Oil and Gas Merger

Marcellus and Utica Shale Mergers, Acquisitions, & Divestitures

In December 2022, I wrote about recent M&A activity in the Marcellus and Utica Shales.  In a departure from our typical analysis and discussion of recent deals, this week’s Energy Valuation Insights blog takes a break from deal multiples and observes the negotiations of the $5.4 billion merger between Sitio Royalties Corp. (“Sitio”), a player in the Marcellus Shale, and Brigham Minerals, Inc. (“Brigham”).

The Brigham Board Discusses Strategic Opportunities

April 21, 2022: The Brigham board of directors, Brigham senior management, and Brigham’s financial advisor, Goldman Sachs, discussed current market conditions and the likely key drivers and challenges to generating future stockholder value creation. Among other items, the Brigham board discussed (i) the highly competitive nature of mineral and royalty acquisitions and (ii) the potential benefits of greater size and scale. Goldman Sachs and Brigham senior management advised the Brigham board that Desert Peak Minerals Corp. (“Desert Peak”), a predecessor to Sitio, had indicated a desire to pursue a merger of equals transaction with Brigham.

Sitio Royalties Is Formed

June 7, 2022: Desert Peak and Falcon Minerals Corporation announced the completion of their merger, which formed Sitio. The management of Desert Peak continued to lead Sitio. On the same day and following the completion of the merger, Chris Conoscenti, Chief Executive Officer of Sitio, provided an update to the Sitio board of directors regarding a potential transaction with Brigham.

The Sitio Board Meets; A Proposal Is Prepared

July 1, 2022: The Sitio board held a meeting to review and discuss an initial non-binding proposal for a potential strategic transaction with Brigham, which considered, among other items: (i) entering into an at-the-market stock-for-stock merger transaction with Brigham and (ii) the post-combination company board of directors which would consist of seven members in total, including two representatives from the Brigham board. The Sitio board authorized management to make the Sitio proposal and to negotiate a potential strategic transaction with Brigham.

The Brigham Board Discusses the Sitio Proposal

July 11, 2022: Brigham senior management and Goldman Sachs reviewed the key features of the non-binding proposal from Sitio with the Brigham board.  They also discussed particular strengths and weaknesses of the proposed combination relative to Brigham management’s views of Brigham’s future as a standalone going concern. The Brigham board’s consensus was to continue discussions with Sitio and to seek to improve the original proposal.

Brigham Asks Sitio to Revise Its Proposal

July 12, 2022: Goldman Sachs contacted Credit Suisse, Sitio’s financial advisor, to communicate Brigham’s views raised at the July 11, 2022 meeting. During such discussions, Goldman Sachs underscored the competitive nature of the process and requested that Sitio submit a revised non-binding proposal by July 22, 2022.

July 16, 2022: Rob Roosa, Brigham’s Chief Executive Officer, conversed with Mr. Conoscenti regarding a potential strategic transaction and the revised proposal from Sitio.

July 16, 2022 to July 22, 2022: Sitio revised its proposal to reiterate the contemplated at-the-market stock-for-stock merger transaction, which implied an exchange ratio of 1.040 based on the 30-trading day average as of the close of trading on the date of the second Sitio proposal. The second Sitio proposal also contemplated that the post-combination company’s board of directors would include three Brigham board representatives and eight members in total.

The Brigham Board Reviews the Second Sitio Proposal

July 26, 2022: The Brigham board reviewed the revised proposal and evaluated the possibility of a strategic transaction, receiving the analyses of Brigham senior management and Goldman Sachs regarding the standalone going concern value and prospects for Brigham as an independent company.

August 23, 2022: The consensus of the Brigham board was that a combination with Sitio would likely maximize value for Brigham stockholders compared to either a combination with other parties or continuing to operate on a standalone basis. The Brigham board agreed it would be appropriate to make a counterproposal to Sitio.

Brigham Counters

August 26, 2022: Goldman Sachs relayed to Credit Suisse a counterproposal to combine with Sitio in a stock-for-stock transaction that would (i) result in Brigham stockholders holding at least 46% of the combined company through a fixed exchange ratio; (ii) be at an exchange ratio that would provide at least a low, single-digit premium to Brigham’s stockholders relative to the most recent closing price of Brigham’s class A common stock before signing; and (iii) include four Brigham board members on the reconstituted new board of nine members.

Sitio Counters the Counter

August 28, 2022: The Sitio board reviewed and discussed the respective asset base for Sitio and Brigham, as well as certain materials provided by Credit Suisse regarding a fixed exchange ratio.  Following this, the Sitio board authorized a counterproposal to Brigham with a fixed exchange ratio that would result in an implied ownership of 45% in the combined company by Brigham stockholders.

August 29, 2022: Sitio delivered a revised proposal letter that contemplated a stock-for-stock transaction with a fixed exchange ratio of 1.097, resulting in an implied ownership of 45% in the combined company by Brigham stockholders. Sitio also agreed to Brigham’s proposal to create a combined company board of directors consisting of nine members, four of whom would be Brigham representatives.

Brigham Stands Its Ground; A Deal Is Near

August 29, 2022: The Brigham board decided to hold firm on at least 46% ownership in the combined company. The Brigham board authorized Brigham senior management to communicate to Sitio that Brigham would (i) begin negotiating the merger agreement and other ancillary agreements if Sitio would agree to a fixed exchange ratio implying at least 46% ownership in the combined company for Brigham stockholders and (ii) to deliver an initial draft of the merger agreement to Sitio if Sitio accepted such exchange ratio.

Mr. Roosa spoke with Mr. Conoscenti to convey that Brigham would only accept a proposal in which Brigham stockholders would own at least 46% of the combined company as well as Brigham’s willingness to target September 6, 2022 for the announcement of a transaction.  The Sitio board discussed the position presented by Mr. Roosa and approved and authorized management to accept Brigham’s ownership position.

Over the next several days, Brigham and Sitio, with the assistance of their advisors, engaged in mutual due diligence and began to consider the best strategic, operational, and social policies for the combined company.

Hold On: False Start, Pencils Down

September 3, 2022: The Brigham board, together with Brigham senior management and Brigham’s advisors, discussed the closing trading prices of Brigham and Sitio as of the prior day, September 2, 2022. They also discussed the fact that if a transaction were announced prior to the opening of trading on September 6, 2022, the exchange ratio of 1.133 shares of New Sitio Common Stock would result in Brigham stockholders receiving 46% of the combined company, implying a 2.8% discount to Brigham’s closing stock price on September 2, 2022.  After discussion, the Brigham board authorized Brigham senior management to communicate to Sitio their desire to adjust the ownership ratio to 47% to provide Brigham stockholders a premium based on the most recent closing prices on September 2, 2022.  These terms would come in exchange for Brigham’s willingness to proceed without the 180-day post-closing lock-ups, to which the Brigham board and senior management ascribed significant value.

Goldman Sachs communicated to Credit Suisse this proposed adjustment.  After this discussion, Mr. Roosa and Mr. Conoscenti discussed adjusting the ownership ratio. During that time, Mr. Conoscenti indicated that Sitio could not increase the ownership ratio.

After these discussions, Davis Polk & Wardell LLP (“Davis Polk”), Sitio’s legal counsel, advised Vinson & Elkins LLP (“V&E”), Brigham’s legal counsel, that their client had instructed them to cease work on the definitive documents.

Brigham Walks It Back

September 4, 2022: The Brigham board convened a meeting to discuss the status of negotiations concerning the merger agreement.  After consulting with its advisors, the Brigham board supported continuing to work towards a September 6, 2022 transaction announcement at a 46% ownership ratio (at the previously agreed exchange ratio of 1.133).

Fairness Opinions Are Rendered; We Have a Deal!

September 5, 2022: V&E, Davis Polk, and representatives of Sitio and Brigham held multiple discussions to finalize outstanding items in the merger agreement and related disclosure schedules.

Members of Sitio’s management and representatives of Davis Polk presented the substantially final terms of the merger agreement to the Sitio board and reviewed the Sitio board’s fiduciary duties in evaluating and approving the merger.

Credit Suisse rendered its oral opinion to the Sitio board as to the fairness, from a financial point of view, to Sitio of the exchange ratio pursuant to the merger agreement.

Thereafter, the Sitio board approved the merger agreement and the consummation of the merger and determined that the merger agreement and the merger are advisable, fair to, and in the best interests of Sitio and its stockholders, and resolved to recommend that stockholders approve the adoption of the merger agreement.

September 6, 2022: Goldman Sachs rendered its opinion to the Brigham board that the exchange ratio under the merger agreement was fair from a financial point of view to the holders of Brigham Class A common stock and Brigham Class B common stock.

Thereafter, the Brigham board: (i) approved, adopted, and declared advisable the merger agreement and the consummation of the mergers; (ii) declared that the merger agreement and the merger transactions are fair to, advisable, and in the best interests of Brigham and Brigham’s stockholders; (iii) authorized and approved entry into the merger agreement and consummation of the merger; and (iv) resolved to recommend that Brigham’s stockholders vote in favor of the proposals contemplated by the merger agreement.

Shortly following the conclusion of the Brigham board meeting, the parties entered into the merger agreement. That same day, before the opening of U.S. stock markets, Brigham and Sitio issued a joint press release announcing the proposed merger and later that day hosted a joint conference call to discuss the merger.


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