Barry Rosenstein‘s JANA Partners is fuming after EQT Corporation (NYSE:EQT) announced it would purchase Rice Energy Inc (NYSE:RICE) for $6.7 billion in the middle of June. The activist hedge fund revealed a 10 million-share, 5.8% stake in EQT on Monday, which it began amassing in April in bullish anticipation of the company’s plans to separate its pipeline operations from its E&P operations.
Instead, EQT Corporation (NYSE:EQT) shocked JANA and many other investors when it announced on June 19 that it would pay a hefty premium for Rice Energy Inc (NYSE:RICE) in a deal that would make it the largest natural gas producer in the U.S, while simultaneously delaying its separation plans. Investors reacted negatively, sending shares down by 14% over the following three days, though they’ve since recovered those losses.
JANA filed another 13D yesterday, which included a letter it sent to the company’s board (which unanimously approved the deal) on the same day, in which it ripped the company’s plans, which it said it was “astounded” by.
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In JANA’s letter to EQT Corporation (NYSE:EQT)’s board, the hedge fund cast doubt on the company’s projected $2.5 billion in synergies that the deal would produce, calling those calculations “highly questionable” and suggesting that the actual synergies achieved could be as little as half that figure. Given the $1.8 billion premium being paid for Rice Energy Inc (NYSE:RICE) and the fact that EQT shareholders’ 65% pro forma ownership of the synergies could amount to as little as $800 million in value, JANA states that the deal could immediately destroy $1 billion in shareholder value.
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JANA also bristled at the fact that EQT is financing the deal with 90 million shares of the company’s stock, even as the company itself has admitted that its shares are undervalued. JANA noted that the deal will also increase the tax costs associated with a future separation on top of that separation’s value to shareholders also being diluted by the large issuance of shares to finance the Rice Energy purchase. Avoiding those additional taxes, which penalize companies for spinning off assets that were acquired within the previous two years, could set the timeline for a separation back by anywhere from two to five years according to JANA. All told, the fund believes that if EQT were to scrap its purchase of Rice Energy and immediately separate its businesses, it could amount to an additional $4.5 billion in shareholder value.
JANA Partners has already allied with several other EQT shareholders, two of which it plans to nominate for seats on EQT’s board as it preps for a potential proxy fight with the company over the deal. Those nominees are Jonathan Cohen, CEO of HepCo Capital Management and Daniel Herz, President of Atlas Energy Group LLC (NYSE:ATLS). The EQT Corporation (NYSE:EQT)/Rice Energy Inc (NYSE:RICE) deal is scheduled to close in the fourth quarter of this year.