Arbs watch $400M Venoco deal

Oil and gas exploration and developer Venoco Inc. passed the minority shareholder approval for its management buyout and now faces a soft deadline next week for financing the $400 million deal.

Venoco of Denver, with oil and gas operations in California, has been subject to a buyout by its chairman and CEO Timothy Marquez since Jan. 16 for $12.50 per share in cash. Marquez controls slightly more than 50% of the Venoco shares. The deal required shareholder approval by the majority of shares that Marquez does not own, which was received Tuesday, June 5.

But the buyout is conditioned on financing, and Marquez launched the proposal without a source for the debt financing. The merger agreement provides that a debt commitment satisfactory to the Venoco special committee be provided within 150 days following the execution of the merger agreement, which should mean that documentation is due by June 15.

Venoco has not been forthcoming about the progress of the financing effort for the deal. Marquez and Venoco did not return calls.

As of the proxy dated May 3, Venoco said that the estimated $400 million required to finance the deal, excluding the rollover of Marquez's equity, could be structured through a private debt placement, possibly convertible into shares and cash, but the structure and terms have not been established and investors not identified.

The deadline for providing the debt commitment is soft in that Marquez can request an extension from the special committee. However, if such an extension is granted, then Marquez has certain obligations to pursue whatever financing opportunities are on the table at the time of the extension.

There have been recent reports that several parties have been performing due diligence regarding supplying debt financing, and there is a possibility that a solution is at hand, a risk arbitrageur said. But it would be surprising if Marquez was not afforded more time by the special committee since a process is under way, he said.

The spread on the deal narrowed somewhat with the minority shareholder approval from $2.85 to $2.50, or 24.7%. Venoco shares traded Wednesday for roughly $10.

The merger agreement has an Oct. 16 termination date. The proxy for the deal projected a closing date in the second quarter.

Marquez is stepping down as CEO under a succession plan announced in concert with the buyout, but the date of that management changeover has not been established. On a May 1 earnings call, Marquez projected that he would step aside in the late third quarter.

Assuming a deal close on Aug. 1, the current spread represents an annualized return of about 160%.

Venoco explores and develops oil and natural gas, and given the low price of natural gas, it has shifted resources in favor of oil production. Recent natural gas deals have faced some difficulty in financing, which accounts for the relatively wide spread. The buyout was struck on the low end of the price range sought by the special committee.

If Marquez fails to close the deal, he is liable for up to $4 million in expense reimbursements to Venoco.