Wednesday, December 16, 2009

Spread widening in Exxon-XTO Deal thanks to potential legislation (XOM, XTO)

The ARB's are taking a slight hit on their long XTO/Short XOM position, as details leak out about possible legislation that could scuttle the deal.

The WSJ reports:

Exxon Mobil Corp.'s $31 billion deal to acquire gas-producer XTO Energy Inc., includes language that would terminate the deal if Congress passes laws making hydraulic fracturing illegal or "commercially impracticable."
Hydraulic fracturing, known as fracking, is the method XTO and other natural-gas companies use to produce gas from hard shale-rock formations. Critics contend that it can cause pollution, especially to drinking water, a charge the industry rejects.
Washington observers said they don't believe Congress will pass any legislation before the Exxon-XTO deal, announced Monday, closes in the second quarter. Only one bill has been introduced so far that would regulate fracking, under the Safe Drinking Water Act.
But Rep. Ed Markey (D., Mass), chairman of the House Energy and Environment Subcommittee of the Energy and Commerce Committee, said Tuesday that he would hold a hearing early next year into Exxon's acquisition of XTO. Mr. Markey said he plans to look at environmental concerns related to air pollution and water contamination from hydraulic fracturing
So the deal is probably not in jeopardy, but this headline risk has widened the premium on the deal from 3% to 3.4% today. Not a catastrophe by any stretch, but if you're a firm leveraging this deal 4-6times, that hurts. So many deals have been all-cash lately (tougher to hedge), that merger-arbitrage funds probably jumped into this one headfirst. I would bet it's a very large portion of assets at merger-arbitrage funds.

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