The planned merger between Linn Energy LLC (NASDAQ:LINE) and Berry Petroleum Company (NYSE:BRY) has been eagerly anticipated by investors for many months. Berry Petroleum Company (NYSE:BRY) shareholders will receive a healthy premium for their shares, and Linn Energy LLC (NASDAQ:LINE) investors get to see their company advance its major strategic priorities.
Unfortunately, when the Securities and Exchange Commission gets involved in a deal, it’s rarely good news. That’s exactly what happened on June 2, and investors need to sift through the rubble to determine if they want to stick around for the conclusion.
The SEC comes calling
Linn Energy LLC (NASDAQ:LINE) said it had agreed to voluntarily disclose information to the SEC’s informal review. The SEC had previously requested this information pertaining to the Berry Petroleum Company (NYSE:BRY) deal, the non-GAAP financial reporting measures provided to investors, and the company’s internal hedging strategies.
Linn Energy LLC (NASDAQ:LINE) and LinnCo LLC (NASDAQ:LNCO), essentially a holding company for Linn Energy LLC (NASDAQ:LINE), both declined more than 12% on the day of the announcement. Berry Petroleum Company (NYSE:BRY) didn’t escape unscathed, falling 5%.
Berry Petroleum Company (NYSE:BRY) wasn’t hit nearly as hard as the two Linn-related stocks, likely because Berry Petroleum Company (NYSE:BRY)’s accounting practices aren’t in doubt, and the company is successful with or without the merger. Berry’s discretionary cash flow rose 6% in its most recent quarter, and the company’s operating margin increased 2 percentage points during the first three months of the year.
Linn Energy LLC (NASDAQ:LINE), meanwhile, has been under heavy scrutiny in recent months from a variety of outlets. A negative article in Barron’s and a presentation by hedge fund Hedgeye Risk Management put a spotlight on the company’s accounting practices. In addition, analysts were quick to downgrade Linn in the wake of the SEC inquiry.
At the same time, Linn is getting a boost from noted investor Leon Cooperman, whose firm Omega Advisors is the largest outside investor of Linn Energy. All told, Omega holds more than $200 million of Linn.
Is the deal dead?
Fundamentally, investors need to know whether or not the Linn-Berry deal will proceed as planned. If you believe the market reaction on the day of the SEC inquiry, it doesn’t look good. The market is clearly betting that this won’t end well.