EQT Pay Plan Is a 'Perverse' Reason for Rice Takeover, Jana Says

  • Barry Rosenstein’s fund says deal would be value-destructive
  • EQT calls proposed $6.7 billion Rice Energy deal strategic fit

Jana Partners accused EQT Corp.’s management of pursuing what the sometimes-activist fund calls a money-losing acquisition of Rice Energy Inc. because of a “perverse” executive compensation scheme.

In a letter to the board Monday, Jana managing partner Barry Rosenstein questioned why EQT would pursue the proposed $6.7 billion transaction rather than spin off of its pipeline assets, a move that Jana has previously advocated.

“A review of EQT’s compensation policy provides at least one answer,” Rosenstein wrote. “EQT’s perverse compensation structure in fact incentivizes management to pursue this suboptimal, dilutive acquisition, no matter the cost to EQT shareholders.”

Pittsburgh-based EQT, while defending the executive compensation plan Monday, has previously acknowledged that its stock is trading at a discount to the value of its individual businesses and has committed to developing a plan to address that by the end of 2018. New York-based Jana, which owns 5.8 percent of EQT, has been fighting the deal, which was announced in June, and pushing instead for EQT to break up into separate businesses.

EQT management’s long-term compensation package is influenced by the company’s three-year average production growth, Rosenstein said.

“This growth however can be achieved by any means and is not measured on a per-share basis, meaning that even value-dilutive acquisitions paid for with undervalued stock, like the Rice transaction, can drive up management compensation,” he said.

The Rice Energy deal would boost EQT’s cash bonus pool by about $130 million from 2018 to 2021, creating a “windfall” for senior management, Rosenstein said.

EQT spokeswoman Natalie Cox said the company’s long-term incentive program aligns management’s interests with shareholders’ by awarding executives company stock.

‘Strategic Fit’

“This compensation structure incentivizes management to act in a manner that will increase total shareholder return,” Cox said Monday in an email. Ninety-eight percent of shareholders who cast a vote at the company’s 2017 annual general meeting approved of the compensation program, she said.

EQT continues to believe Rice is an “outstanding strategic fit” that will create at least $2.5 billion in synergies with another $7.5 billion possible, she said.

“The transaction will also improve the competitive positioning of EQT’s businesses and enhance our ability to address the sum-of-the-parts discount,” she said.

Jana also criticized the structure of the board, which allows for an executive committee including former and current chief executive officers, to take actions on behalf of the board when it isn’t in session.

“EQT shareholders should reject the proposed Rice acquisition, unless of course EQT management is willing to forsake the millions in additional compensation they would receive for this value-destroying transaction,” Rosenstein said.

Jana’s contention will certainly draw some investor questions, said Scott Hanold, a Minneapolis-based analyst for RBC Capital Markets LLC.

“I don’t think it’s going to sway a whole lot of votes,” he said.

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