425: DNOW Updates Merger Terms Amid Shareholder Lawsuits

DNOW Inc. filed supplemental disclosures to its joint proxy statement/prospectus for the MRC Global merger, addressing shareholder lawsuits alleging material omissions.

Summary

• DNOW Inc. (NYSE: DNOW) is proceeding with its previously announced merger with MRC Global, Inc., initially agreed upon on June 26, 2025.
• The company has received several demand letters and three complaints from purported shareholders alleging material omissions in the joint proxy statement/prospectus, claiming violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934.
• DNOW voluntarily issued supplemental disclosures to its joint proxy statement/prospectus to address these claims, avoid nuisance, cost, and distraction, and prevent delays to the merger closing, without admitting any liability or wrongdoing.
• The supplemental disclosures amend sections related to the opinions of DNOW's financial advisor (Goldman Sachs) and MRC Global's financial advisor (J.P. Morgan), providing updated valuation metrics and assumptions.
• Goldman Sachs' illustrative present values per share for DNOW ranged from $15.70 to $18.66, for MRC Global from $15.60 to $19.39, and for the pro forma combined company from $17.15 to $20.92.
• J.P. Morgan's analysis derived implied equity values per share for MRC Global ranging from $12.80 to $18.30 and for DNOW ranging from $14.60 to $18.70, based on various EBITDA multiples.

Sentiment

Score: 6

Explanation: The filing addresses legal challenges to a significant strategic merger. While the lawsuits introduce a negative element, the company's proactive and confident response to mitigate potential delays and clarify disclosures is a positive sign for the merger's progression.

Positives

• DNOW is proactively addressing shareholder concerns and legal challenges by providing supplemental disclosures to ensure the merger proceeds without delay.
• The company maintains that its original disclosures fully comply with applicable law and that the shareholder allegations are without merit, indicating confidence in its legal position.
• The merger with MRC Global is progressing, with the Registration Statement declared effective and the definitive joint proxy statement/prospectus mailed, signaling continued momentum towards completion.

Negatives

• Shareholder lawsuits have been filed against DNOW and MRC Global, alleging material omissions in the merger proxy statement, which introduces legal uncertainty and potential costs.
• The necessity of issuing supplemental disclosures, even if voluntary, indicates that the initial proxy statement faced scrutiny and required additional clarification.
• The lawsuits could potentially lead to delays in the merger closing, despite DNOW's efforts to preclude such delays.

Risks

• Inability to successfully integrate MRC Global's businesses and technologies, potentially leading to the combined company not operating as effectively and efficiently as expected.
• The expected benefits and synergies of the proposed transaction may not be fully achieved in a timely manner, or at all.
• Inability to retain and hire key personnel for either DNOW or MRC Global.
• Failure to obtain shareholder approval or satisfy other conditions required to consummate the proposed transaction, or the transaction failing to close for any other reason.
• Regulatory approvals, consents, or authorizations required for the proposed transaction may not be obtained or may be subject to unanticipated conditions.
• The occurrence of any event, change, or other circumstance that could give rise to the termination of the proposed transaction.
• Unanticipated difficulties, liabilities, or expenditures relating to the transaction.
• The effect of the announcement, pendency, or completion of the proposed transaction on the parties' business relationships and business operations generally.
• The effect of the announcement or pendency of the proposed transaction on the parties' common stock prices and uncertainty as to the long-term value of DNOW's or MRC Global's common stock.
• Risks that the proposed transaction disrupts current plans and operations of DNOW or MRC Global and their respective management teams, and potential difficulties in hiring or retaining employees.
• Rating agency actions and DNOW's and MRC Global's ability to access shortand long-term debt markets on a timely and affordable basis.
• Changes in commodity prices, including a prolonged decline in these prices relative to historical or future expected levels.
• Global and regional changes in demand, supply, prices, differentials, or other market conditions affecting oil and gas, including impacts from military conflicts (Ukraine, Middle East), security threats, public health crises, or production quotas.
• Legislative and regulatory initiatives addressing global climate change or other environmental concerns.
• Public health crises, including pandemics and epidemics, and any related company or government policies or actions.
• Investment in and development of competing or alternative energy sources.
• International monetary conditions and exchange rate fluctuations.
• Changes in international trade relationships or governmental policies, including price caps, trade restrictions, tariffs, or sanctions.
• DNOW's or MRC Global's ability to collect payments when due.
• DNOW's or MRC Global's ability to complete any dispositions or acquisitions on time, if at all.
• The possibility that regulatory approvals for any dispositions or acquisitions will not be received on a timely basis, if at all, or that such approvals may require modification to the terms of those transactions.
• Business disruptions following any dispositions or acquisitions, including the diversion of management time and attention.
• Potential liability for remedial actions under existing or future environmental regulations.
• Potential liability resulting from pending or future litigation, including the current shareholder actions.
• The impact of competition and consolidation in the oil and natural gas industry.
• Limited access to capital or insurance or significantly higher cost of capital or insurance related to illiquidity or uncertainty in financial markets or investor sentiment.
• General domestic and international economic and political conditions or developments.
• Changes in fiscal regime or tax, environmental, and other laws applicable to DNOW's or MRC Global's businesses.
• Disruptions resulting from accidents, extraordinary weather events, civil unrest, political events, war, terrorism, cybersecurity threats, or information technology failures.

Future Outlook

The proposed business combination transaction between DNOW and MRC Global is expected to proceed, with the companies anticipating the successful integration of businesses and technologies, and the realization of expected benefits and synergies. The supplemental disclosures aim to facilitate the timely closing of the merger by addressing shareholder concerns.

Management Comments

• DNOW believes that the disclosures set forth in the joint proxy statement/prospectus comply fully with applicable law, that no further disclosure beyond that already contained in the joint proxy statement/prospectus is required under applicable law, and that the allegations asserted in the Shareholder Actions are entirely without merit.
• DNOW is voluntarily supplementing the joint proxy statement/prospectus with the Supplemental Disclosures in order to moot these disclosure claims, to avoid nuisance, cost and distraction, and to preclude any efforts to delay the closing of the Merger, and without admitting any liability or wrongdoing.

Industry Context

This merger represents a significant consolidation within the industrial distribution sector, particularly for companies serving the oil and natural gas industry. The combined entity will likely aim for increased market share, operational efficiencies, and enhanced competitive positioning against other large distributors like DXP Enterprises, WESCO International, and Rexel S.A. The industry faces ongoing challenges and opportunities related to commodity price volatility, energy transition, and global economic conditions.

Comparison to Industry Standards

• J.P. Morgan's analysis compared MRC Global and DNOW to DXP Enterprises, Inc., WESCO International, Inc., and Rexel S.A. based on FV/2025E Adj. EBITDA and FV/2026E Adj. EBITDA multiples.
• MRC Global's FV/2025E Adj. EBITDA of 7.3x and FV/2026E Adj. EBITDA of 6.6x are lower than DXP (8.8x, 8.1x), WESCO (9.4x, 8.6x), and Rexel (8.2x, 7.8x), suggesting a potentially lower valuation relative to these peers.
• DNOW's FV/2025E Adj. EBITDA of 7.3x and FV/2026E Adj. EBITDA of 7.0x are also generally lower than DXP, WESCO, and Rexel, indicating similar valuation trends within its peer group.
• The selected reference ranges for FV/EBITDA multiples (7.00x to 9.25x for 2025E and 6.50x to 8.50x for 2026E) reflect a broad industry valuation spectrum, with MRC Global and DNOW falling towards the lower end of these ranges based on their current multiples.

Legal Proceedings

• Several demand letters have been received from purported shareholders of DNOW regarding the merger.
• Three complaints have been filed: Robert Garfield v. Deborah Adams et al. (Index No. 908471-25), Steven Weiss v. DNOW Inc. et al. (Index No. 654945/2025), and Robert Scott v. DNOW Inc. et al. (Index No. 654962/2025).
• The Shareholder Actions assert that certain allegedly material omissions in the joint proxy statement/prospectus purportedly give rise to violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 14a-9 promulgated thereunder.
• DNOW is voluntarily supplementing the joint proxy statement/prospectus to moot these disclosure claims and avoid nuisance, cost, and distraction, without admitting liability or wrongdoing.

Stakeholder Impact

• Shareholders: Directly impacted by the merger terms, potential value creation from the combined entity, and the ongoing legal challenges which could affect the merger's timing or outcome.
• Employees: Potential impacts from integration of DNOW and MRC Global businesses, including changes in roles, responsibilities, and retention efforts.
• Customers and Suppliers: Business relationships may be affected by the combined company's operations, supply chain, and market presence.
• Management: Focused on successfully integrating the companies and navigating legal challenges to ensure a smooth merger closing.

Next Steps

• Shareholders of DNOW and MRC Global will need to vote on the proposed transaction.
• The companies will work towards satisfying all remaining conditions for the merger to close.
• Potential further discussions and agreements between DNOW and MRC Global executive officers regarding post-merger employment or consultation services.

Key Dates

Recommendation

The filing provides crucial updates on a significant merger, including detailed financial advisor valuations and the company's proactive response to shareholder lawsuits. While the merger itself is a strategic positive, the legal challenges introduce a degree of uncertainty. The supplemental disclosures aim to clarify information and prevent delays, which is a positive step. However, until the legal matters are fully resolved and the merger officially closes, a 'hold' recommendation is prudent for investors to monitor developments without making immediate significant changes to their positions.

Keywords

DNOW, MRC Global, Merger, Acquisition, SEC Filing, Form 8-K, Proxy Statement, Shareholder Lawsuit, Financial Advisor Opinion, Valuation, Oil and Gas, Industrial Distribution, EBITDA Multiples, Discounted Cash Flow