The combined company's balance sheet strength "opens up the door to large, transformational assets that we would not be able to participate in before individually," Pinecrest CEO Wade Becker told a conference call Wednesday to discuss the transaction.
Pinecrest is focused on the Red Earth area of north-central Alberta while Spartan is involved in the Cardium light oil formation in central Alberta and the Bakken light oil region in southeast Saskatchewan.
The new firm, which may operate under a different name, will be led by Becker and the existing Pinecrest (TSXV:PRY) management team.
Spartan (TSX:STO) CEO Richard McHardy will join the merged company's board at closing, as will current Spartan director Don Archibald.
Both Becker and McHardy said they'd long been looking at assets that would complement their companies' existing holdings. Time and again, Spartan's emerged as a good choice for Pinecrest and vice-versa.
"We don't see this as a sale transaction. We see this as a transaction where we're building something that's better than either of the two companies individually," said McHardy.
"This is a transaction which started out with some casual conversations and then turned into more serious conversations in a short period of time. And when it came together, it became abundantly obvious that this was a transaction that benefited both groups of shareholders."
Becker said he sees the new company chasing after large, oil-in-place assets that have been familiar to both himself and McHardy throughout various roles in the oilpatch.
"They're assets that we have coveted, looked at, bid on," he said.
"It's those types of assets that, frankly, don't come up for sale very often, but I think we're at a point in time with some industry pressure on balance sheets that some quality assets are shaking loose."
Under terms of the deal, Pinecrest is to acquire all of the outstanding common shares of Spartan on the basis of 2.738 common shares of Pinecrest for each outstanding Spartan share.
The exchange ratio represents a price of $5.12 per Spartan share and $1.87 per Pinecrest share, based on their Tuesday closing prices.
The companies see the combined entity having an enterprise value of close to $1 billion, taking into account Spartan's stock market value of just under $427 million, Pinecrest's stock market value of $400 million and net debt at the time of closing.
Production in 2013 is expected to be relatively flat compared with the combined 9,600 barrels of oil per day both firms anticipate churning out this year.
When the deal closes, and prior to a proposed three-for-one share consolidation, the combined company will have approximately 513.4 million shares outstanding with Spartan shareholders owning approximately 49 per cent.
Meanwhile, Pinecrest said its board plans an initial annualized dividend of 0.155 per share, which translates to an annual yield of 8.3 per cent based on its pre-announcement share price.
"As it seems to be soup du jour in the Canadian oilpatch, the combined company will form a yield-plus-growth entity," Desjardins Securities analyst Tim Murray wrote in a note to clients.
"We view the combination of the two premier light oil growth companies positively. Although the combined entity currently has a good platform to roll out a yield-plus-growth model, we believe the key to long-term sustainability will be reducing corporate declines, improving capital efficiencies beyond the growth model, prudent management of the balance sheet and an active hedge book."
The deal is subject to approval by at least two-thirds of shareholders of both companies as well as regulatory and court approvals.
Directors and officers of Spartan, who collectively hold approximately 27 per cent of that company's shares have agreed to support the deal as have directors and officers of Pinecrest, who collectively hold approximately 24 per cent.
Both have agreed not to solicit competing bids, have been granted the right to match competing proposals and agreed to $12.5-million non-completion fees under certain circumstances.
Pinecrest shares closed down six cents to $1.81 on the TSX Venture Exchange, while Spartan shares sank 5.7 per cent, or 29 cents, to $4.83 on the senior exchange. The two companies were among the most heavily traded on the two markets.Suggest a correction