M&A Deals of the Year
Introduction   Apple and partners-Nortel   Google and Motorola Mobility   Access Industries -Warner Music   Cumulus Media-Citadel   Comcast-NBC Universal   H&R Block-TaxAct   Caterpillar-Bucyrus   Ares and CPPIB-99 Cents Only Stores   Grupo Bimbo-Sara Lee baking assets   BHP Billiton-Petrohawk   Peabody Energy-Macarthur Coal   Selling off Bank of America   Dish Network-Blockbuster   Amgen-BioVex   KKR et al.-Samson Investment   Pearson-Connections Education   Alleghany-Transatlantic   Breaking up Dexia

Samson Investment Co.'s $7.2 billion sale to an investor group led by Kohlberg Kravis Roberts & Co. LP was the largest-ever buyout of an oil and gas producer, the second-largest leveraged buyout of the year and the third-largest exploration and production acquisition since 2008, three distinctions that would put it in anyone's Deals of the Year category. But what made it more interesting was the equity-heavy financing and the recruiting of a Japanese investor to make the deal go.

The family that controlled Samson -- the Schustermans of Tulsa, Okla. -- hired Jefferies & Co. last summer to help it consider strategic options after seeing how others were fetching high prices for their assets, knowing that it needed capital to exploit its unconventional properties and fearful that higher capital gains taxes might be coming. KKR, led by Tulsa native Henry Kravis, who knew the family, was early on the scene among only a handful of parties Jefferies brought in -- a couple of financial and strategic players each, including Korea National Oil Corp. and BHP Billiton Ltd., according to sources -- and locked up exclusive negotiations to acquire the entire company by October.

By then markets were jumpy, banks weren't eager to lend, and Stacy Schusterman, who had taken over Samson when her father Charles died in 2000, wanted a comfort level that the deal would get done without too much leverage. "She didn't want to do a transaction with someone who had financing contingencies," says Ajay Khurana, who advised the family for Jefferies. So KKR decided to fund the deal with mostly cash and began looking for investors. "It took a lot of equity, so we thought, 'Who could add value as a partner here and also contribute to the large equity requirement?' " says Marc Lipschultz, who worked on the deal for KKR.

Enter Itochu Corp. KKR already had a relationship with the Japanese trading giant, and it brought it in as a 25% investor in the fall. "Itochu has a global commodities business, and they, like many non-U.S.-based companies, had a desire to participate in unconventional resources here," Lipschultz says. "When we raised the prospect of a partnership, they got engaged." Oil and gas private equity firm Natural Gas Partners signed on as a 12% investor and Crestview Partners at 8%, leaving KKR at 54% and Samson management 1%.

In the end, the investor group put up $4 billion of the $7.2 billion purchase price, and 11 banks, which clamored to get in the deal, financed the remaining $3.2 billion with a $2.35 billion asset-based revolving loan (which wasn't expected to be drawn down entirely) and a $2.25 billion bridge-to-high-yield-bond facility. (Only three or four lending banks ended up collecting advisory fees, including Tudor, Pickering, Holt & Co. Securities Inc. and Credit Suisse Group.)

It wasn't a difficult sell: Samson had hard, diverse assets (1 million acres across 12 plays with interests in 10,000 wells), strong cash flow from conventional assets that could be used to partially fund the development of the unconventional ones and a solid management team.

"Credit wasn't an issue," Tudor Pickering's Bobby Tudor says. "There were big equity checks obviously, and they're not going into it with a highly leveraged balance sheet. But it was totally driven by how the buyers wanted to finance it. They have the capital structure they wanted."

Lipschultz says he's pleased with the result. "With volatility in commodity prices, debt presents risk. You want to have capital and staying power to develop these resources. You don't want to find yourself in a position where you're stretched," he says. "We presented something that the market liked, not pushing it to the edge."

Sources say there was a little dickering on price, but the deal financing stayed firm between the announcement on Nov. 23 and closing, which came less than a month later, on Dec. 21. Samson kept its Gulf of Mexico onshore and deepwater properties, which it plans to develop further and perhaps sell in three to five years or so. Their value today: between $2.5 billion and $3 billion.

So Samson wasn't an LBO according to typical definitions, but it made the Schusterman family, KKR and the banks happy. And unlike its investment in shale gas developer East Resources Inc., which it sold to Royal Dutch Shell plc in 2010 for $4.7 billion at a fourfold profit in a year's time, KKR plans to keep Samson awhile so it can develop the properties, thus creating even more value.

"As with most PE investments, we have a long-term mindset," Lipschultz says. "We see a lot of opportunity."