Denver's Forest Oil Corp. and Metarie, La.-based Forcenergy Inc. will merge, forming one of the 10 largest U.S. independent producers. The new company, with a market cap of more than $1.5 billion, will be called Forest Oil Corp. and be headquartered in Denver. Proved reserves will total 1.4 billion cu. ft. of gas. The estimated $895-million transaction, which includes the assumption of debt, has an implied value to Forcenergy's shareholders of $25.60 per share, representing a 21% premium to that company's pre-merger-announcement closing price of $21.19 per share. Forest's offer is for 1.6 common shares per common share of Forcenergy. Upon completion, Forest will reverse-split its common shares 1-for-2. Forest shareholders will hold about 56% of the combined company. The merger will be treated as a tax-free reorganization and accounted for as a pooling of interests. "This combination meets Forest's criteria of strategic fit," says Robert S. Boswell, who will retain the title of chairman and chief executive of Forest Oil. "It places the company in one of North America's highest potential frontier exploration areas-Alaska-with an established platform for expansion. Also, it significantly increases the company's position in the Gulf of Mexico, where Forest has historically achieved its highest rates of return." Gus Zepernick, Forcenergy's chief executive and who will be president and chief operating officer of Forest, says the combined companies will have a much stronger balance sheet. "This will allow us to [move ahead] on a large inventory of lower-risk exploitation and high-impact exploration projects...and deliver consistent shareholder return." Shannon L. Nome, managing director and E&P analyst for Banc of America Securities LLC in Houston, says the merger makes sense qualitatively. "The combined company will have more critical mass in the Gulf of Mexico, which is a key 'cash cow' region. Forest can then redeploy that cash into all of its frontier growth areas." Nome concurs with Zepernick that the move strengthens Forest's balance sheet. "In this market, bigger is better, in terms of lower cost of capital and broader investor appeal." The merger also makes sense quantitatively, she adds. "The purchase price-around five times EBITDA (earnings before interest, taxes, depreciation and amortization)-looks fair." Salomon Smith Barney advised Forest on the merger and Chase Securities provided the fairness opinion. Forcenergy was advised by Petrie Parkman & Co. and Lehman Brothers. Moody's Investors Service revised to positive its outlook on Forest's B2 senior subordinated note, Ba3 senior implied, and B1 senior unsecured issuer ratings. The ratings are in the lower range of a midgrade investment. Moody's reported that Forest "should benefit from increased scale and diversification, and the merged entity will continue to benefit strategically from the involvement of Phillip Anschutz." The Colorado-based investor has considerable interests in both companies. -Brian A. Toal