Is the Linn-Berry Merger in Jeopardy?

The planned merger between LINN Energy (NASDAQ: LINEQ  ) and Berry Petroleum (UNKNOWN: BRY.DL2  ) , first announced earlier this year, has been bogged down under the weight of an SEC inquiry for many months. Investors have eagerly awaited any bit of news, since Berry Petroleum shareholders will receive a healthy premium for their shares, and Linn investors get to see their company advance its major strategic priorities.

Unfortunately, when the Securities and Exchange Commission gets involved in a deal, it's rarely good news. That's exactly what happened earlier this summer, and investors may be losing confidence that the deal will go through as planned. If the deal gets canceled, it will be a major disappointment, and recent developments have been disappointing.

Warning signs aplenty
Initially, Linn said it had agreed to disclose information to the SEC's informal review. The SEC had previously requested this information pertaining to the Berry deal, the non-GAAP financial reporting measures provided to investors, and the company's internal hedging strategies.

While still waiting for an SEC ruling, things recently got more complicated when Berry released a regulatory filing in which it stated that if the merger with LINN does not occur on or before October 31, either side can unilaterally terminate the proposed deal. In its filing, Berry stated: "There can be no assurances as to whether the parties will agree to extend the End Date or that the parties will refrain from exercising their rights to terminate the Merger Agreement."

The deal is obviously crucial to LINN's strategic growth initiatives. Not only does Berry hold considerable assets, but its assets are also of a very high quality and are extremely attractive. Berry's long-life and low-decline assets would provide a meaningful geographic presence in the Permian Basin, East Texas, and California, solidly complimenting LINN's U.S. operational footprint.

Moreover, Berry's proven reserves, of approximately 1.65 trillion cubic feet equivalents, would boost LINN's current production by 30%. LINN would also receive 3,200 producing wells and more than 200,000 net acres, and has already identified the potential for cost synergies and additional probable or possible reserves in the amount of 3.8 trillion cubic feet equivalents.

Should either LINN or Berry walk away from the deal, LINN shareholders would likely suffer. Although LINN would maintain an impressive asset portfolio, its future growth would undoubtedly take a blow. And, one area investors would take a hit is in the company's ability to grow its already-generous distribution.

Several months ago when the acquisition was first announced, LINN advised investors that it would increase its annualized distribution from its current $2.90 to $3.08, representing a solid 6% increase. However, the last time I wrote about LINN, I cautioned investors that losing the Berry deal would likely negate LINN's planned distribution increase. And, investors have noticed that Linn has stuck to its $2.90 annualized rate.

Not receiving the distribution increase would likely be a disappointment, but at the same time, LINN still provides a market-trouncing yield.

Still a healthy distribution to hang your hat on
Even if the deal falls through, and LINN isn't able to increase its payout as planned, investors are still receiving a double-digit yield. In an era of interest rates sitting near-record lows, there's still plenty to like about Linn and its financial holding company LinnCo (NASDAQ: LNCOQ  ) .

LinnCo provides investors the added benefit of not technically being classified as a partnership. As a result, you won't have to deal with the hassles of a K-1 statement, making things easier come tax time. And, you're still receiving the same $2.90 per-share distribution, which amounts to a 10% yield at recent prices. Unfortunately, LINN investors have little choice but to wait for further developments and hope the deal goes through. At the very least, you're being paid well to wait.

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Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

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