LinnCo Raises Offer for Berry Petroleum to $3.04 Billion

Nov. 4 (Bloomberg) -- LinnCo LLC, whose shares have dropped since it disclosed a regulatory inquiry in July, raised its offer for Berry Petroleum Co. to $3.04 billion in stock after the target “consistently outperformed expectations.”

LinnCo, whose only asset is stock in Linn Energy LLC, will boost the exchange ratio it’s offering to Berry holders to 1.68 shares from 1.25, the companies said in a joint statement today. That values the oil and natural gas producer at $55.79 a share, based on the Nov. 1 closing price, up from $46.24 when the acquisition was announced. The deal’s deadline was extended to Jan. 31 after a prior Oct. 31 time limit lapsed.

LinnCo agreed to purchase Denver-based Berry in February for $2.42 billion to increase oil reserves. The value of the deal has fallen as the acquirer’s stock price dropped. In July, the U.S. Securities and Exchange Commission told the company it had begun a “non-public inquiry” and was seeking documents related to the transaction as well as hedging strategies and certain financial measures of Linn and LinnCo.

“The deal is going to go through,” Kevin Kaiser, an analyst at Hedgeye Risk Management LLC who has questioned Linn’s accounting for maintenance costs, said in a phone interview. “The SEC inquiry is not over but as far as the SEC’s involvement in the merger, it seems like that is all taken care of.”

Berry Rises

Before the announcement, Berry had been trading at a premium to the LinnCo offer since July 1, when the SEC probe was made public. The shares rose 6.1 percent to $51.72 at the close in New York, the biggest gain since the deal was announced. LinnCo increased 0.5 percent to $33.36 and Linn climbed 3.2 percent to $31.80.

Linn had to raise its offer due to higher oil prices and better operational results from Berry since the transaction was announced, Kaiser said. Berry reported third-quarter earnings last month that exceeded analysts’ estimates as oil output increased 20 percent from a year earlier.

Oil futures prices in New York gained 15 percent from a year earlier to average $105.81 a barrel in the third quarter.

The deal, which includes both Berry’s Class A and Class B shares, is structured as a merger with LinnCo followed by the acquisition of the Berry assets by Linn Energy. The total value is $4.9 billion including debt, according to the statement today.

SEC Approval

The purchase won’t be beneficial to LinnCo in the long term, said Kaiser, whose company has recommended shorting shares in LinnCo and Linn.

“Their issue is that distributable cash flow is not representative at all of the company’s ability to generate free cash flow and the deal amplifies that problem,” Kaiser said.

The companies have been awaiting SEC approval for their S-4 filing before putting the deal up for a shareholder vote. Berry said on Oct. 24 either side could walk away from the deal after Oct. 31. The commission had no further questions on the most recent amended S-4, Houston-based Linn and LinnCo said in a Nov. 1 statement.

“The last week or so it looks like they made some progress getting the SEC stuff in order and so that should be out of the way and now you have an offer that is higher than the current stock price,” Jason Wangler, an equity analyst at Wunderlich Securities Inc. in Houston, said by phone. “It’s pretty open and shut.”

(Linn will hold a conference call to discuss the transaction and third quarter results at 11 a.m. New York time tomorrow, accessible on LIVE <GO>.)

To contact the reporters on this story: Jim Polson in New York at jpolson@bloomberg.net; Peter Ward in New York at pward41@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net