A Delaware court has ordered C&J Energy Services Inc. (NYSE: CJES) to hit pause on its $2.86 billion merger with a division of Nabors Industries Ltd. (NYSE: NBR).
Instead, C&J is required to solicit competing bids for 30 days.
After the waiting period, C&J can move forward with a merger with Nabors’ North American completion and production business. C&J appears to have failed to seek out others for a merger agreement, according to documents filed with the Securities and Exchange Commission (SEC).
The company vowed to take the matter to the Delaware Supreme Court as quickly as possible.
Josh Comstock, founder, chairman and CEO of C&J, said that while he respects the court's process, he disagrees with its findings and decision regarding the company’s obligation to seek other proposals before executing a merger agreement.
"Our transaction with Nabors creates a diversified completion and production services provider, and we believe it creates significant stockholder value,” he said. “We remain committed to this transaction and focused on closing as soon as possible.”
The C&J/Nabors deal is also awaiting SEC approval of form S-4. Following SEC approval, 30 days must pass before a shareholder vote can take place.
The court ruling may be a favor to C&J, said James Crandell, managing director, Cowen and Co.
During the past month, C&J is down about 13% compared to a 4.1% drop for a peer group that includes companies such as Superior Energy Services (NYSE: SPN) and RPC Inc. (NYSE: RES).
Though the scale of the deal gives C&J a competitive advantage and is an important strategic combination, putting the two companies together seems tricky.
“Our sense is C&J stockholder appetite for this deal had been waning as integration risk seemed high, and C&J was taking on more challenging businesses—well servicing and fluid hauling—as the industry enters a period of softer demand,” Crandell said. “Additionally, any potential for a higher valuation should be viewed positively.”
When the deal was announced in June, it was lauded by some analysts for bringing normalization to a challenged market hydraulic fracturing market.
“For CJES, it allows for significant consolidation in the U.S. frack market, something that is needed,” Bill Herbert, managing director and co-head of securities for Simmons & Co. International, said June 25.
Under the agreement, a new company called C&J Energy Services Ltd. would be formed through the merger of Bermuda-based Nabors' North American completion and production businesses for $2.86 billion in cash and stock. Houston-based C&J would survive the merger as a subsidiary of the new company.
The new company—called C&J Energy Services Ltd.—offered the prospect of bringing together part of a splintered hydraulic fracturing market.
If C&J shareholders do not approve the deal, C&J would owe Nabors $17 million or $0.31 per share. If C&J entered an agreement for a superior proposal they would owe Nabors $65 million or $1.18 per share. It seems unclear to us how termination fees would be applied if the merger agreement were compromised by this order, Crandell said.
The new company was to be incorporated in Bermuda with corporate offices in Houston and listed on the NYSE under the ticker CJES. Nabors would gain 53% ownership of the new company and about $937 million in cash.
C&J would finance the acquisition with a $1.3 billion fully underwritten financing commitment from Citi, which will also refinance existing debt. Additionally, C&J secured a $600 million commitment on a new credit facility that is expected to be undrawn following the closing of the transaction. The companies expected the transaction to close by the end of the year.
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