The board of SilverBow Resources Inc. has once again turned down the latest proposal from asset manager Kimmeridge to merge it with Kimmeridge Texas Gas (KTG).
In a letter to shareholders, the board said that Kimmeridge’s most recent merger proposal “substantially undervalues SilverBow” after consulting independent financial and legal advisors. The board underscored the importance of conducting due diligence on KTG, as relevant information is needed “to determine the actual value, not Kimmeridge’s assertion of value, of the KTG assets”.
“Interestingly, Kimmeridge has not tried to sell KTG in a competitive process, which would be a logical action to crystallize value for KTG’s investors if KTG is as valuable as Kimmeridge claims it to be,” the board continued in the letter. “Notably, Kimmeridge has not made public the relevant information for SilverBow and its shareholders to be able to independently evaluate these assets”.
“SilverBow has been and continues to be open to exploring a transaction at an appropriate valuation”, the company’s board said. However, it said that Kimmeridge was demanding that SilverBow acquire KTG on its proposed valuation and financing terms, “as with prior engagements”.
The board further wrote that “Kimmeridge is trying to install its director nominees on the board, in order to take control of the company without paying an appropriate premium and have their newly appointed directors force the KTG transaction at a later date”.
As such, the board urged shareholders to reject voting for the three directors nominated by Kimmeridge at the upcoming SilverBow annual meeting of shareholders, and instead vote for the three directors nominated by the board.
Kimmeridge Response
In response, Kimmeridge published a letter of its own, signed by its managing director Ben Dell. In the letter Kimmeridge accused the SilverBow board and management team of entrenching themselves “while summarily rejecting compelling proposals and denying shareholders the right to fiduciaries who will independently analyze opportunities to maximize long-term value”.
“We believe that a strong majority of shareholders support authentic engagement and would vote in favor of the March 13 proposal if the incumbent board didn't stand in the way,” Kimmeridge wrote. “In our view, the board and management's desire to maintain the status quo (including their positions and compensation) prevents the board from presenting this value-creating transaction to shareholders”.
Kimmeridge also noted that it has recently provided all the information that the SilverBow board is seeking, and would have shared it sooner had the board requested it earlier. Kimmeridge said it published a website with all the requested information containing additional detail on KTG's financials and asset base, including well data, operating statistics and inventory maps.
“Should the board continue to stonewall, mislead investors, and fail to provide all SilverBow shareholders the full benefit of independent oversight of the management team and assessment of the March 13 proposal, then we believe the best path forward will be for SilverBow shareholders to elect our three independent, highly-qualified nominees to the board,” Kimmeridge concluded.
Under the terms of the March proposal, Kimmeridge would contribute the KTG assets to SilverBow in exchange for 32.4 million shares priced at $34 per share. In addition, Kimmeridge would inject $500 million of fresh equity capital at the same price of $34 per share, in exchange for 14.7 million shares.
At the closing of the proposed transaction, Kimmeridge and its affiliates would own a majority of the outstanding shares of the combined company, with a total of 50.3 million shares of common stock inclusive of Kimmeridge's current 3.3 million share position in SilverBow.
Kimmeridge, which holds 12.9 percent of SilverBow’s outstanding shares, noted that the KTG assets have an equity value of $1.1 billion and an expected enterprise value of $1.4 billion at closing of the proposed transaction.
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