425: Aris Water to Merge with Western Midstream

Aris Water Solutions, Inc. has entered into a definitive merger agreement to be acquired by Western Midstream Partners, LP, becoming a wholly-owned subsidiary.

Summary

• Aris Water Solutions, Inc. (Company) and Aris Water Holdings, LLC (Company OpCo) have entered into a Merger Agreement with Western Midstream Partners, LP (WES) and its subsidiaries.
• The transaction involves a series of mergers (OpCo Merger, Cash Merger, Unit Merger) resulting in the Company and Company OpCo becoming wholly-owned subsidiaries of WES.
• Aris shareholders will have an election to receive consideration in one of three forms for each share of Class A Common Stock or Company OpCo Stapled Unit:
• Mixed Election: 0.450 WES Common Units and $7.00 in cash.
• Cash Election: $25.00 in cash, subject to proration to ensure the aggregate cash paid does not exceed $415 million.
• Common Unit Election: 0.625 WES Common Units.
• If no election is made, the consideration will default to the Common Unit Election.
• The Company's Board of Directors unanimously approved the merger, deeming it in the best interests of the Company and its stockholders.
• Key stockholders, including COG Operating LLC, Yorktown Energy Partners XI, L.P., Solaris Energy Capital, LLC, William Zartler, and Amanda Brock, collectively owning approximately 42% of outstanding common stock, have entered into support agreements to vote in favor of the merger.
• The Tax Receivable Agreement (TRA) will be terminated upon closing, with an aggregate payment of $80 million in cash to TRA Holders, a reduction from the estimated $183.4 million Early Termination Payment.
• The merger is subject to customary closing conditions, including Company Stockholder Approval, regulatory clearances (HSR Act expiration/termination), and effectiveness of the Form S-4 registration statement.

Sentiment

Score: 8

Explanation: The sentiment is highly positive due to the definitive merger agreement, unanimous board approval, significant shareholder support, and a favorable amendment to the Tax Receivable Agreement, which significantly reduces a contingent liability. The multiple consideration options for shareholders also add to the positive outlook for the transaction's success.

Positives

• The Company's Board of Directors unanimously approved the merger, indicating strong internal support for the transaction.
• Significant stockholder support, with approximately 42% of outstanding common stock holders agreeing to vote in favor of the merger, increases the likelihood of approval.
• The Tax Receivable Agreement (TRA) will be terminated with a fixed payment of $80 million, significantly reducing the estimated $183.4 million Early Termination Payment, which is a positive for the acquiring entity and potentially for the Company's valuation.
• Shareholders are offered multiple forms of consideration (cash, units, or a mix), providing flexibility based on individual investment preferences.
• The transaction is intended to qualify for tax-deferred treatment for unit holders under Section 721(a) of the Code, which can be beneficial for long-term investors.

Negatives

• The cash election consideration is subject to proration, meaning shareholders electing cash may receive a portion of their consideration in WES Common Units if the aggregate cash limit of $415 million is exceeded.
• The Company will cease to exist as an independent publicly traded entity, becoming a wholly-owned subsidiary of WES, leading to delisting of its shares.
• A termination fee of $57 million is payable by the Company to WES under certain circumstances, such as a change of recommendation or termination to pursue a superior offer.
• The Company may also be required to reimburse WES for expenses up to $11,875,000 if the merger agreement is terminated due to failure to obtain stockholder approval under specific conditions.

Risks

• Failure to obtain the Company Stockholder Approval could prevent the merger from closing.
• Regulatory approvals, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, are conditions to closing and could face delays or require divestitures.
• Legal restraints, such as injunctions or new laws, could prohibit or prevent the consummation of the mergers.
• The occurrence of a 'Company Material Adverse Effect' or 'Parent Material Adverse Effect' prior to closing could lead to termination of the agreement.
• The cash election is subject to proration, meaning shareholders may not receive their desired mix of cash and units.
• The value of the unit consideration is subject to fluctuations in the trading price of WES Common Units between the agreement date and closing.

Future Outlook

The merger is expected to result in Aris Water Solutions and Aris Water Holdings becoming wholly-owned subsidiaries of Western Midstream Partners. The transaction is intended to qualify for tax-deferred treatment for unit holders under Section 721(a) of the Code. The parties aim to close the transaction by February 6, 2026, with a possible extension to May 6, 2026, if regulatory clearances are pending. Post-merger, the directors of the surviving corporation will be appointed by Arrakis Holdings (a WES subsidiary), and the officers will be the initial officers of Cash Merger Sub, indicating a full integration into WES's operational structure.

Management Comments

• The Board of Directors of Aris Water Solutions, Inc. unanimously determined that it is in the best interests of the Company and its stockholders to enter into the Merger Agreement.
• The Board of Directors of Aris Water Solutions, Inc. unanimously approved and declared advisable the Merger Agreement and the consummation of the transactions contemplated thereby, including the Mergers.
• The Board of Directors of Aris Water Solutions, Inc. resolved to recommend the adoption of the Merger Agreement by the Company's stockholders.

Industry Context

This merger represents a consolidation within the U.S. midstream and water solutions sector, specifically in the oil and gas industry. Western Midstream Partners, a major player in the midstream space, is expanding its footprint by acquiring Aris Water Solutions, a company specializing in produced water management. This trend of consolidation is common in mature or consolidating industries, driven by desires for economies of scale, operational synergies, and expanded service offerings. The acquisition of water management assets by a traditional midstream company highlights the increasing importance of water infrastructure in oil and gas operations, particularly in regions like the Permian Basin where Aris operates, as environmental regulations and operational efficiencies drive demand for integrated solutions.

Comparison to Industry Standards

• The consideration structure, offering a mix of cash and equity, is a common approach in industry mergers, allowing shareholders flexibility and participation in the combined entity's future.
• The termination fee of $57 million, representing approximately 3.1% of Aris Water Solutions' market capitalization (based on 32.68M Class A shares * $25/share cash election value = ~$817M, so $57M / $817M = ~7%), is within the typical range (often 2-4%) for similar-sized public company mergers, reflecting standard deal protection mechanisms.
• The reduction of the Tax Receivable Agreement payment from an estimated $183.4 million to a fixed $80 million is a significant positive adjustment, indicating successful negotiation to reduce a contingent liability, which is a favorable outcome compared to typical full payout scenarios in change-of-control events.
• The unanimous board approval and significant insider support (42% of common stock) are strong indicators of internal alignment and confidence in the deal, often seen in well-structured strategic acquisitions.

Management Changes

Corporate Governance

Legal Proceedings

• The Company and Parent commit to cooperating and using reasonable best efforts to defend any lawsuits or other legal proceedings challenging the Merger Agreement or the consummation of the transactions.

Related Party Transactions

• Concurrently with the Merger Agreement, COG Operating LLC (a wholly owned subsidiary of ConocoPhillips), Yorktown Energy Partners XI, L.P., Solaris Energy Capital, LLC (an affiliate of William Zartler), William Zartler, and Amanda Brock (collectively, the Supporting Stockholders), beneficially owning approximately 42% of the outstanding shares, entered into Support Agreements to vote in favor of the merger.
• Simultaneously with the Merger Agreement, the Company, WES, and the Majority TRA Holders (including COG Operating LLC, Yorktown Energy Partners XI, L.P., Solaris Energy Capital, LLC, William A. Zartler, and Amanda Brock) entered into an amendment to the Tax Receivable Agreement, fixing the termination payment at $80 million.

Stakeholder Impact

• Shareholders: Will receive cash, WES common units, or a combination, providing liquidity and/or continued exposure to the combined entity. Those electing cash may face proration.
• Employees: Continuing employees will receive comparable compensation and benefits for one year post-merger, and service with Aris will be recognized for benefit purposes. Non-continuing employees will receive severance and cash payments for equity awards.
• Customers and Suppliers: The combined entity will aim to preserve relationships with significant customers and suppliers, suggesting continuity in operations and contracts.
• TRA Holders: Will receive a fixed cash payment of $80 million, resolving the contingent liability under the Tax Receivable Agreement.
• Regulatory Bodies: The transaction is subject to review and approval by governmental entities, particularly under antitrust laws, which could lead to conditions or divestitures.

Next Steps

• Parent will file a registration statement on Form S-4, which will include the Company's proxy statement/prospectus, with the SEC.
• The Form S-4 needs to be declared effective by the SEC.
• The Company will mail the proxy statement/prospectus to its stockholders.
• The Company will convene a Stockholders Meeting to vote on the adoption of the Merger Agreement.
• The parties will seek necessary regulatory clearances, including the expiration or termination of the HSR Act waiting period.
• Parent will take actions to ensure WES Common Units to be issued in the mergers are approved for listing on the NYSE.
• The Company will work to discharge its Credit Agreement and provide customary legal opinions related to its Indenture prior to closing.
• Parent will file a registration statement on Form S-8 for the Assumed RSU Awards as soon as reasonably practicable after the Effective Time.

Key Dates

Recommendation

The filing announces a definitive merger agreement, which typically means the majority of the price-sensitive information has already been incorporated into the stock price. For investors holding Aris Water Solutions shares, the recommendation is 'hold' to await the closing of the merger and receive the agreed-upon consideration. Any significant price movement from this point would likely be due to arbitrage opportunities or unexpected developments related to closing conditions, which are less predictable for a general recommendation. For new investors, a 'buy' might be considered for arbitrage if the spread to the implied deal value is attractive, but this carries specific risks.

Keywords

Merger, Acquisition, Water Solutions, Midstream, Oil and Gas Services, SEC Filing, ARIS, WES, Corporate Action, Stockholder Vote, Tax Receivable Agreement