8-K: WES to Acquire Aris Water Solutions in Cash & Unit Deal

Western Midstream Partners, LP will acquire Aris Water Solutions, Inc. in a multi-step merger transaction offering shareholders a choice of cash, WES common units, or a combination.

Summary

• Aris Water Solutions, Inc. (ARIS) and Aris Water Holdings, LLC (Company OpCo) have entered into a definitive Agreement and Plan of Merger with Western Midstream Partners, LP (WES) and its subsidiaries.
• The transaction involves a series of mergers where Aris Water Solutions and Company OpCo will become wholly-owned subsidiaries of WES.
• ARIS shareholders and Company OpCo stapled unit holders can elect to receive consideration in three forms: (i) a mixed election of 0.450 WES common units and $7.00 in cash, (ii) a cash election of $25.00 per unit (subject to proration if the aggregate cash exceeds $415 million), or (iii) a common unit election of 0.625 WES common units.
• If no election is made, the consideration defaults to the common unit election of 0.625 WES common units.
• The Board of Directors of Aris Water Solutions unanimously approved the merger agreement and recommends its adoption by stockholders.
• Key shareholders, including COG Operating LLC (a ConocoPhillips subsidiary), Yorktown Energy Partners XI, L.P., Solaris Energy Capital, LLC, William Zartler, and Amanda Brock, collectively owning approximately 42% of outstanding Company Common Stock, have entered into support agreements to vote in favor of the merger.
• The existing Tax Receivable Agreement (TRA) will be terminated, with an aggregate cash payment of $80 million to TRA Holders on the Closing Date, significantly less than the estimated $183.4 million early termination payment under the original TRA terms.

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 reduces a substantial contingent liability. The transaction offers a clear path to liquidity or continued investment in a larger entity for ARIS shareholders.

Positives

• The Board of Directors of Aris Water Solutions unanimously approved the merger, indicating strong internal support for the transaction.
• Significant shareholder support, with approximately 42% of outstanding common stock committed to voting in favor through support agreements, increases the likelihood of stockholder approval.
• Shareholders are offered flexibility with three consideration options: cash, WES common units, or a combination, allowing them to tailor their investment outcome.
• The amendment to the Tax Receivable Agreement reduces the termination payment to TRA Holders from an estimated $183.4 million to a fixed $80 million, which is a positive financial outcome for the acquiring entity and potentially for ARIS shareholders by reducing a contingent liability.

Negatives

• The cash election consideration is subject to proration, meaning shareholders electing all cash may receive a portion in WES common units if the aggregate cash limit of $415 million is exceeded.
• Aris Water Solutions is subject to a termination fee of $57 million payable to Western Midstream Partners under certain conditions, such as a change of recommendation by the ARIS Board or termination to pursue a superior offer.
• Aris Water Solutions' business operations are subject to customary pre-closing covenants, limiting certain actions without WES's consent, which could restrict strategic flexibility until closing.

Risks

• Failure to obtain the required Aris Water Solutions stockholder approval could prevent the merger from closing.
• The merger is subject to regulatory approvals, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, which could delay or prevent closing.
• Legal restraints, such as injunctions or new laws prohibiting the merger, could prevent its consummation.
• The possibility of a 'Superior Offer' emerging could lead to the termination of the current merger agreement, requiring Aris Water Solutions to pay a significant termination fee.
• Potential litigation challenging the merger or its terms could arise, requiring defense and potentially delaying the transaction.

Future Outlook

Following the mergers, Aris Water Solutions, Inc. and Aris Water Holdings, LLC will operate as wholly-owned subsidiaries of Western Midstream Partners, LP. The transaction is intended to be treated as a tax-deferred contribution of Company OpCo Stapled Units and Company Class A Common Stock to WES in exchange for Common Units under Section 721(a) of the Code, with cash consideration treated as a taxable sale or disguised sale.

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, approved and declared advisable the Merger Agreement, and resolved to recommend its adoption by stockholders.

Industry Context

This acquisition represents a consolidation within the water midstream sector, a critical component of the broader oil and gas industry. Such mergers often aim to achieve economies of scale, optimize operational efficiencies, and expand geographic footprint or service offerings, particularly in key basins like the Permian where both companies likely operate. It reflects a trend towards integration and optimization of infrastructure assets in the energy sector.

Management Changes

Corporate Governance

Legal Proceedings

• The Company and Parent commit to cooperating and using reasonable best efforts to contest and resist any litigation, administrative or judicial action, or other proceeding challenging the Mergers or the transactions contemplated by the Agreement.

Related Party Transactions

• An amendment to the Tax Receivable Agreement (TRA) was entered into with certain TRA Holders (COG Operating LLC, Yorktown Energy Partners XI, L.P., Solaris Energy Capital, LLC, William Zartler, and Amanda Brock), who are related parties, to fix the termination payment at $80 million.
• Support Agreements were entered into with the Supporting Stockholders (COG Operating LLC, Yorktown Energy Partners XI, L.P., Solaris Energy Capital, LLC, William Zartler, and Amanda Brock), who are related parties, committing them to vote in favor of the merger.

Stakeholder Impact

• Shareholders: Will receive consideration in cash, WES common units, or a combination, providing liquidity or continued investment in a larger entity.
• Employees: Continuing employees will receive comparable compensation and benefits for at least one year post-merger, with severance benefits for involuntary termination without cause. Equity awards will be assumed by WES or cashed out for non-continuing employees and non-employee directors.
• TRA Holders: Will receive a fixed $80 million cash payment upon termination of the Tax Receivable Agreement, resolving a significant contingent liability.
• Customers & Suppliers: The merger aims to preserve existing relationships, suggesting continuity in operations and service.

Next Steps

• Western Midstream Partners to file a registration statement on Form S-4 with the SEC, which will include a proxy statement for Aris Water Solutions' stockholders.
• Aris Water Solutions to convene a Stockholders Meeting to vote on the adoption of the Merger Agreement.
• Obtain necessary regulatory clearances, including the expiration or termination of the HSR Act waiting period.
• Western Midstream Partners to seek approval for listing of its common units on the NYSE.
• Aris Water Solutions to make the $80 million cash payment to TRA Holders on the Closing Date, prior to the Effective Time.
• Consummation of the Mergers, after which Aris Water Solutions and Company OpCo will become wholly-owned subsidiaries of Western Midstream Partners.

Key Dates

Recommendation

The definitive merger agreement offers Aris Water Solutions shareholders a choice of cash or units, with a significant portion of shares already committed to the deal via support agreements. The transaction is strategically beneficial for Western Midstream Partners, expanding its water midstream footprint. The agreed-upon TRA termination payment is also significantly lower than the estimated original amount, which is a positive for the acquiring entity. This combination of factors suggests a strong likelihood of deal completion and a favorable outcome for ARIS shareholders.

Keywords

Aris Water Solutions, Western Midstream Partners, Merger, Acquisition, Oil & Gas, Water Midstream, SEC Filing, 8-K, ARIS, WES, Energy Infrastructure, Produced Water, Tax Receivable Agreement