Exxon Mobil(XOM) and XTO Energy (XTO) energy announced an all-stock merger this morning, as Exxon extends its reach in the natural gas space:
Under the terms of the agreement, approved by the boards of directors of both companies, ExxonMobil has agreed to issue 0.7098 common shares for each common share of XTO. This represents a 25 percent premium to XTO stockholders. The transaction value includes $10 billion of existing XTO debt and is based on the closing share prices of ExxonMobil and XTO on December 11, 2009.
Oops. Thanks to the all-stock nature of the transaction, that 25% premium has fallen to 19%. Exxon shares are down 4% this morning as investors worry they overpaid. And as XOM shares fall, so does the implied deal price, currently at 49.40, a 19% premium (XOM shares at 69.6 X .7098 = 49.4). XTO is trading at 47.81, leaving a not-too-shabby 3% premium for merger arb's to chase.
A chart of oil versus natural gas would lead one to think now is certainly the time to favor gas in an acquisition strategy:
But as Collins Stewart pointed out this morning, investors are upset that the deal price values Exxon's oil and gas reserves lower than what they paid for XTO's. Well to be fair, the price is certainly cheaper now as XOM shares (and the deal price) have fallen 4%. XOM may be betting that regardless of whose reserves are more generously valued, they see natural gas as underpriced.
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