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Legacy Reserves LP Message Board

  • abter1 abter1 Apr 7, 2009 2:38 PM Flag

    Research report on LGCY

    LGCY research report
    [source: Wach. Sec., released 4-7-09]

    • Key Takeaways. Apollo Management has proposed to take LGCY private by
    purchasing all of the partnership’s common units at a cash price of $14 per unit.
    The buyout offer represents a 40% premium to LGCY’s closing price on April 3 of
    $10.03. While the premium appears significant on the surface, LGCY closed at
    $13.94 on January 28. The offer price roughly equates to the value of LGCY’s
    proved reserves and represents a discount to the current valuation of LGCY’s two
    closest comparables (oil-weighted), ENP and PSE. Given these factors, we believe
    Apollo may need to increase its bid to $15-17 per unit to get the deal done.

    • Sector Implications Positive. While the offer price appears conservative, the bid is
    a clear positive for the upstream MLP sector, in our view, as it affirms (1) the
    inherent value and potential upside of the upstream MLP sector, which continues to
    trade at a steep discount, (2) could put a floor on valuations, and (3) could act as a
    catalyst for the sector. We expect private equity and others to explore potential
    acquisitions of Legacy and other upstream MLPs.

    • Offer Price Appears Conservative--A Higher Bid Is Possible. Based on our
    analysis, Apollo’s buyout offer of $14 per unit reflects the value of LGCY’s proved
    reserves (i.e. NAV) based on current strip prices. However, it assigns little-to-no
    credit for its ability to create value through accretive acquisitions and/or drilling
    opportunities. Essentially, Apollo would be acquiring the management team and the
    upside associated with a potentially successful acquisition strategy for “free.”
    Alternatively, based on current strip prices, our DCF model suggests a value of $19
    per unit assuming LGCY completes $50MM of acquisitions annually. However, we
    recognize that in the current environm.ent, acquisitions could be difficult to
    finance. Hence, we believe $15-17 per unit could represent a fair buyout price.

    • Rationale For The Transaction. We believe management’s support of Apollo’s
    buyout offer is primarily liquidity-driven. By partnering with a large private equity
    firm with financial flexibility, LGCY could continue to make acquisitions during a
    period of potentially attractive acquisition opportunities as other companies are
    likely to be forced to sell assets at distressed prices in order to deleverage.
    Additionally, LGCY would be better positioned from a borrowing base perspective.

    and from later in the report:
    LGCY Intends To Hire A Financial Advisor--Transaction Could Take 4-6 Months To Close
    LGCY’s conflicts committee intends to retain a third-party financial advisor and legal counsel to assist in
    assessing Apollo’s buyout proposal. There are several outcomes that could arise out of the committee’s
    assessment: (1) the committee could find Apollo’s offer to be fair and approve the transaction; (2) it could
    entertain additional buyers in an attempt to secure a higher bid; or (3) it could recommend that LGCY remain
    a public company as the company’s fair value exceeds bids being offered by prospective buyers. To note, any
    potential transaction is subject to 51% unitholder approval. The entire process could take 4-6 months to close.

    Buyout Offer Essentially Makes IPO Investors Whole
    LGCY completed its IPO of 6.9MM units on January 18, 2007, for a price of $19 per unit. Including
    distributions, unitholders that participated in the IPO would essentially be “made whole” on their investment
    if Apollo’s buyout offer is accepted. To note, prior to its IPO, LGCY had issued 5.0MM common units in a
    private offering to institutional investors at a price of $17 per unit.

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