PE stock is up 5% today after Parsley Energy Inc (NYSE:PE) announced it would acquire Jagged Peak Energy Inc (NYSE:JAG) in an all-stock merger worth approximately $2.27 billion USD.
The deal will see the Austin, Texas-based energy firm take on Jagged Peak’s net debt of approximately $625 million USD as of June 30, 2019. Under the terms of the agreement, JAG shareholders will receive a fixed exchange ratio of 0.447 shares of PE stock for each share of JAG stock they own. This represents $7.59 per Jagged Peak share based on Parsley’s closing price on October 11, 2019, and a premium of 11.2% compared to JAG’s closing price on October 11, 2019.
“The combination of Parsley and Jagged Peak is a natural fit,” said Matt Gallagher, Parsley’s President and CEO. “This transaction also creates tangible synergies that will enhance our corporate free cash flow profile and will be shared by the combined shareholder base. Ultimately, I am proud of the high level of execution Parsley has delivered throughout 2019, and I am excited by the prospects of what the combination of Parsley and Jagged Peak can deliver for shareholders in 2020.” PE shares are currently trading at $15.96.
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The merger has several benefits for Parsley Energy, helping to increase the company’s footprint in the Delaware Basin, where the majority of its current operations are already located. Perhaps most importantly for investors in PE stock, this deal will be an important factor in helping the company achieve its key financial metrics for 2020. Parsley expects to save approximately $25 million USD on general and administrative expenses during the first year of the merger, and a further $40 million USD to $50 million USD each year after.
While this merger makes sense on paper, PE stock tanked over 10% last week when news of the deal first broke. This is most likely as a result of investors’ attitudes to mergers in the oil and gas sector, which generally have struggled to create value for shareholders. Parsley will need to follow through on its cost-saving commitments in order to make this deal successful for investors in PE stock.
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