What happened
Shares of Falcon Minerals (FLMN), which owns royalty interests in onshore U.S. energy lands, fell as much as 12.5% on Wednesday. By roughly 1 p.m. today, the stock had regained some of the lost ground but was still lower by about 8.5%. A merger was the big news, but it's a little complicated.
So what
To get the easy stuff out of the way, Falcon Minerals agreed to join forces with privately-held Desert Peak Minerals in a $1.9 billion deal. Both companies own royalty interests in onshore U.S. oil and natural gas lands, so the combination is complementary.
More importantly, the goal is to increase in scale so the combined entity can become an even more effective royalty consolidator. The deal is expected to close in the second quarter of 2022. There's already support for the deal from an institutional investor who owns 40% of Falcon Minerals and is affiliated with Blackstone. From this big-picture perspective, the deal seems to make a lot of sense.
Image source: Getty Images.
Now for the complications. Falcon Minerals is issuing 235 million Class C shares to Desert Peak's private owners. After the deal is consummated, however, Falcon Minerals investors will own only 27% of the combined company, with the rest going to Desert Peak's owners. That's a bit of a reverse of the norm in a merger, given that the "buyer" is ending up owning less of the newly enlarged company. And, as if that weren't enough, Desert Peak's management team will be running the combined company. So in some ways, this looks like it was a way for Desert Peak to get onto a public exchange without having to go through an initial public offering.
Prior to the close of the deal, meanwhile, Falcon Minerals will have a 1-for-4 reverse stock split, the only effect of which will be to increase the stock price (the share issuance noted above will be adjusted for the reverse split). In other words, there are a lot of moving parts here for investors to get their heads around.
Now what
Owning royalty interests in oil-producing properties can be a reliable and pretty lucrative business, so energy-focused investors should probably be interested in this story. That is especially true given that Falcon Minerals believes the deal will be accretive to cash flow right away in 2022.
However, as is the norm in an acquisition, the "buyer's" stock has fallen in value, even though this is being pitched as a merger. Now add in the unusual nature of the deal, where the company being bought is going to own the vast majority of the combined entity and run it, and it might be best for investors to take a wait-and-see attitude. Letting the new team prove its chops would be a prudent and conservative approach.
