uploads///MRD RRC comps

Will the MRD-RRC Deal Get Competitive?


Dec. 4 2020, Updated 10:52 a.m. ET

Competitive deals can make your quarter

Competitive deals can make your quarter if you’re a merger arbitrage professional. If you get two companies bidding against each other, a 1% gross spread can easily become a 10% gross spread by the time everything is said and done. Recently, we saw a bidding war in the Starwood (HOT)-Marriott (MAR) deal.

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Purchase price was a reasonable premium

Range Resources’ (RRC) offer of $15.75 per share was a 17% premium to Memorial Resource Development’s (MRD) price before the deal was announced. A 17% premium is generally considered to be a reasonable premium, perhaps a little on the low side.

Was there a sale process?

The companies don’t discuss how the transaction came to be in the press release. This means that we’ll have to wait until the preliminary proxy statement comes out to get the background on the deal. It doesn’t appear that Memorial had any sort of sale process going on, so we’ll have to wait to see if other potential buyers got a chance to look at the company.

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Deal comparisons

Arbitrageurs often compare the price the acquirer is paying to the price of other deals in the same industry. This is always more of an art than a science. No two companies are alike and interest rate environments change. The best comparisons for this transaction include the following:

  • Rosetta Resources-Noble Energy
  • Canadian Oil Sands-Suncor
  • Berry Petroleum-LinnCo

These transactions are the closest deals to the Memorial Resource Development-Range Resources merger. In this transaction, Range Resources is paying about 9.7x revenues and 36x earnings before interest, tax, depreciation, and amortization. These multiples are lower than the comparables. However, differences in proven and probable reserves often account for multiple differences in energy companies.

Other merger arbitrage resources

Other important merger spreads include the deal between Energy Transfer (ETE) and Williams Companies (WMB). For the basics on risk arbitrage investing, please refer to Merger arbitrage must-knows: A key guide for investors.

Investors who would like diversified exposure to the financial sector should look at the S&P SPDR Energy ETF (XLE).


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