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Side Effects From SandRidge Energy’s “Poison Pill” Are Still Unknown

Nov 29, 2017

In an effort to move forward with the purchase of a Colorado-based energy company, SandRidge Energy issued a so-called “poison pill” Monday to stave off efforts by an activist investor to block the deal.

SandRidge announced a deal in mid-November to purchase Bonanza Creek Energy. Shortly thereafter, one of SandRidge’s largest shareholders, Fir Tree Partners, indicated it was against the deal. Activist investor Carl Icahn echoed the concerns of Fir Tree and later increased his stake in SandRidge in an effort to block the deal.

Sarah Terry-Cobo writes in the Journal Record that SandRidge adopted a short-term shareholder rights plan, or poison pill, to make it more difficult for Fir Tree and Icahn to block the deal. University of Central Oklahoma energy finance professor Stuart McDonald told Terry-Cobo the poison pill will dilute shares and weakens the company’s position as it confronts the two large shareholders.

MacDonald said a poison pill is like a gun; if management uses it to entrench themselves while they’re doing bad or extravagant things, then it could hurt innocent people.

“Or it can genuinely be used to save a company from guys who are basically pirates and only looking for short-term gain,” he said. “It’s a good thing if the board has shareholders in mind; it’s bad if they have management in mind.”

Terry-Cobo told KGOU’s The Business Intelligence Report that a poison pill allows a company to issue more shares to smaller shareholders.

“Say an investor owns 51 percent of the shares, they could force a takeover without board approval because they have the majority. But the poison pill dilutes those shares so now maybe they only have 30 percent. That person has to buy more in order to get that majority stake and avoid a takeover to the board,” Terry-Cobo said.

The majority of SandRidge’s shareholders are currently bondholders as a result of the company’s recent emergence from bankruptcy. Terry-Cobo writes that means an activist investor has to convince fewer shareholders to block a deal. Additionally, she said shareholders will sometimes pay activist investors to stop blocking a deal.

“Sometimes, generally speaking, activist shareholders are in it to stir up controversy and get paid. If the other shareholders don't want one or two parties to block a deal they can actually pay the contrarian to settle the dispute and not block it,” Terry-Cobo said.

Terry-Cobo says SandRidge is committed to buying Bonanza Creek because merging with the Colorado-based company would give SandRidge more places to drill.

“Bonanza ... has a lot of oil and gas that it produces already. So that's good for them because, for a driller, their credit is based on how much they're pumping but it's also based on how much they could drill and pump. So those reserves, as they call them, could help them expand their credit line,” Terry-Cobo said.

Terry-Cobo says shareholders, such as Fir Tree Partners, want Sandridge to rebuild the company following its bankruptcy, and they think the Bonanza Creek purchase would do the opposite.

“He [Carl Icahn] calls it ‘nonsensical’ and says that it’s empire-building, reminiscent of the prior CEO and founder Tom Ward,” Terry-Cobo said.

FULL  TRANSCRIPT

Jacob McCleland: You're- listening to the Business Intelligence Report a weekly conversation about business news in Oklahoma. I'm Jacob McCleland and I'm joined now by Journal Record senior reporter Sara Terry-Cobo. Sarah, how's it going?.

Sarah Terry-Cobo: Oh it's great. How are you Jacob?

McCleland: I'm doing very well. I do want to talk to you today about activist investor Carl Icahn and SandRidge Energy. Last week, Icahn upped his stake in Sandridge and publicly opposed the company's proposed purchase of Bonanza Creek Energy. Why is Icahn against this merger?

Terry-Cobo: Well he calls it nonsensical and says that its empire building, reminiscent of the prior CEO and founder Tom Ward but he's really chiming in with what another investor has already said. That's a firm called Fir Tree Partners.

McCleland: Now Sandridge in Bonanza Creek both recently emerged from bankruptcy. I mean how does this factor in to shareholders' hesitance to giving the merger the green light?

Terry-Cobo: Well they both have a relatively clean balance sheet or basically no debt. So shareholders really want SandRidge to rebuild the company. The folks at Fir Tree say spending a bunch of money to buy out another driller and diluting the shareholders is contrary to that.

McCleland: So on a Monday this week Sandridge adopted a poison pill. First could you kind of explain what a poison pill is?

Terry-Cobo: Right. So a poison pill sounds bad but it can be used for good. So what it does is it allows a company to issue more of its shares to its shareholders that own at least 10 percent. So say an investor owns 51 percent of the shares, they could force a takeover without board approval because they have the majority. But the poison pill dilutes those shares so now maybe they only have 30 percent. That person has to buy more in order to get that majority stake and avoid a takeover to the board.

McCleland: How will the poison pill help Sandridge get the support of shareholders that it needs to go through with the merger with Bonanza Creek?

Terry-Cobo: Well it would have to make a shareholder buy more stock to get that majority control. But it could hurt them too. Sandridge, that is, because there aren't many shareholders left. That as a result of the bankruptcy. There are only a handful of bondholders who are the shareholders now as opposed to a competitor who may have thousands of individual shareholders.

McCleland: So Sara is this poison pill, is this an attempt by the company to go ahead with this merger with Bonanza Creek? Or is this more to avoid a potential shareholder takeover of the company?

Terry-Cobo: I think it's the former, really. I think they are really committed to this Bonanza Creek merger and they say there is all kinds of benefits to this. They really don't want another dustup with shareholders and they think it's a good deal for their investors.

McCleland: You know whenever you have an activist shareholder fight like this and the company introduces a poison pill, I mean, how does that typically end up for the activist shareholder, in this case Carl Icahn?

Terry-Cobo: Well it depends. So sometimes, generally speaking, activist shareholders are in it to stir up controversy and get paid. If the other shareholders don't want one or two parties to block a deal they can actually pay the contrarian to settle the dispute and not block it. Sometimes it's called greenmail and it's perfectly legal.

McCleland: So earlier you mentioned that Icahn and Fir Tree Partners believe the merger would delete shares. What's Sandridge saying about the benefits of the merger?

Terry-Cobo: They say it gives them a lot more places to drill. This is in Colorado and Bonanza already has a lot of oil and gas that it produces already. So that's good for them because for a driller their credit is based on how much they're pumping but it's also based on how much they could drill and pump. So those reserves, as they call them, could help them expand their credit line.

McCleland: This is the first time Carl Icahn got into the middle of it of a shareholder fight with an Oklahoma City company.

Terry-Cobo: No. He has been involved with Oklahoma companies before. Most recently with Chesapeake Energy a few years ago and right now he's actually also weighing in on CVR Refining. That's a Texas-based company that has a refinery in Wynnewood which is near Pauls Valley.

McCleland: So how do you think this whole thing with SandRidge is going to shake out?

Terry-Cobo: Ooh let me consult my crystal ball. It is too soon to tell. I'm not really sure but I am interested to see how this shakes out. And we should keep an eye out on those regulatory filings that may give us some more details on what SandRidge thinks.

McCleland: Sarah Terry-Cobo is a senior reporter for the Journal Record newspaper. Sarah thank you so much for joining us.

Terry-Cobo: Great to be here Jacob. Thanks for having me.

McCleland: KGOU and the Journal Record clambering each week on the Business Intelligence Report. You can follow us on social media. We're on Facebook and Twitter @journalrecord and @kgounews. Sarah's Twitter handle is @JRSarahTC. I'm @jacobmccleland.

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