SCHEDULE: Permian Basin Royalty Trust, US Land Guild Plan Combination

Permian Basin Royalty Trust and US Land Guild, LLC, a subsidiary of Blackbeard Holdings, LLC, have entered into a non-binding term sheet for a potential business combination.

Summary

• A non-binding term sheet outlines a proposed business combination between Permian Basin Royalty Trust (PBT) and US Land Guild, LLC (USLG), a subsidiary of Blackbeard Holdings, LLC (Blackbeard).
• The transaction involves forming a new Texas-based corporation, New PubCo, to be listed on the NYSE and NYSE Texas.
• New PubCo will acquire all assets and operations of PBT, along with USLG, which holds approximately 66,500 acres of surface estate and a 15% royalty interest from Blackbeard.
• In exchange, Blackbeard and PBT unitholders will receive shares of New PubCo common stock. Blackbeard will also receive certain working interests from PBT.
• Pro forma ownership post-transaction is expected to be 58% for former PBT unitholders and 42% for Blackbeard and its affiliates.
• USLG's approximately $80 million in indebtedness will become an obligation of the combined company.
• A Master Services Agreement (MSA) is planned with a Blackbeard affiliate for management, operational, and strategic services, with an annual fee of $5.0 million for the first year, subject to annual review.
• A Long-Term Incentive Plan (LTIP) will be established for directors, officers, and employees, with grants benchmarked against comparable public companies.
• Blackbeard will have certain transfer restrictions, voting rights, and consent rights, particularly concerning sales of New PubCo shares and material transactions.
• The transaction is subject to customary closing conditions, including definitive agreements, regulatory approvals, and unitholder approval from PBT.

Sentiment

Score: 6

Explanation: StockSavvy.ai views this as a moderately positive development, as it outlines a clear path towards a potential business combination and the creation of a new publicly traded entity with significant assets. However, the non-binding nature of the term sheet and the assumption of debt introduce uncertainties.

Positives

• Potential for a combined entity (New PubCo) to be listed on the NYSE and NYSE Texas, offering enhanced liquidity and access to capital markets.
• PBT unitholders are projected to own 58% of the combined company, indicating significant retained ownership.
• Blackbeard's contribution of significant surface estate (66,500 acres) and royalty interests alongside PBT's assets could create a more robust business.
• A structured board composition with designated roles for Blackbeard, SoftVest, and independent directors aims for balanced governance.
• An Acquisition Advisory Committee, modeled after Texas Pacific Land Corporation's, will focus on future growth through acquisitions.
• A planned Long-Term Incentive Plan is designed to align management and employee interests with shareholder value through stock grants.

Negatives

• The term sheet is non-binding, meaning the transaction may not be completed.
• USLG's existing debt of approximately $80 million will be assumed by the combined company.
• A Master Services Agreement with a Blackbeard affiliate includes a $5.0 million annual management fee, which could be a significant ongoing cost.
• Blackbeard retains substantial influence over the combined company's board and strategic decisions, especially while owning over 25% of shares.
• Transaction expenses, excluding SEC Form S-4 preparation, will be borne by the combined company, subject to a cap.
• PBT's working interests will be subject to a 15% royalty burden.

Risks

• The non-binding nature of the term sheet means the transaction may not materialize.
• Completion is contingent on negotiating definitive agreements, regulatory approvals, and PBT unitholder approval.
• The $5.0 million annual management fee to a Blackbeard affiliate could impact profitability if not managed effectively.
• Blackbeard's significant ownership and board designation rights could lead to potential conflicts of interest or limit independent decision-making.
• The assumption of USLG's $80 million debt by the combined company increases financial leverage.
• The PBT working interests being subject to a 15% royalty burden reduces their net value.

Future Outlook

The filing outlines a proposed business combination that would result in a new publicly traded company, New PubCo, listed on the NYSE and NYSE Texas. The combined entity is expected to acquire assets from both Permian Basin Royalty Trust and US Land Guild, with a pro forma ownership split favoring former PBT unitholders. A Master Services Agreement and a Long-Term Incentive Plan are planned, and governance structures are detailed, including board composition and acquisition advisory functions. The transaction is subject to definitive agreements, regulatory approvals, and unitholder approval.

Management Comments

• SoftVest is engaging in these discussions solely in its capacity as a minority unit holder of PBT, and neither SoftVest nor any of its affiliates, nor their respective directors, officers or other representatives is acting on behalf of PBT, its trustee or any other PBT unit holder.
• The terms and provisions of this Term Sheet are illustrative and intended solely as the basis for potential discussions and are not intended to be, and do not constitute, a legally binding obligation with respect to a potential transaction in any respect.
• Each of SoftVest, USLG and Blackbeard disclaim any obligation to negotiate with respect to the potential transaction and confirm that a legally binding obligation would only be made pursuant to a definitive agreement negotiated and executed by the parties.

Industry Context

StockSavvy.ai notes that this proposed combination between a royalty trust (Permian Basin Royalty Trust) and an entity with significant land and mineral interests (US Land Guild, LLC) reflects a trend of consolidation and restructuring within the energy sector, particularly in the Permian Basin. The formation of a new publicly traded entity (New PubCo) aims to leverage scale and potentially access broader capital markets, a common strategy for companies seeking to optimize operations and growth in a competitive landscape.

Comparison to Industry Standards

• The proposed Long-Term Incentive Plan (LTIP) for New PubCo will be benchmarked against a peer group of comparable public companies to ensure alignment with market practices for grants of restricted stock and performance shares.
• The structure of the Acquisition Advisory Committee, modeled after Texas Pacific Land Corporation (TPL), suggests an intent to adopt governance and operational strategies proven effective in the industry for managing land and mineral asset acquisitions.

Management Changes

Corporate Governance

Legal Proceedings

• No specific legal proceedings are detailed in the provided term sheet or Schedule 13D amendment.

Related Party Transactions

• A Master Services Agreement (MSA) is planned with an affiliate of Blackbeard to provide management, operational, sourcing, administrative, and strategic services to the Combined Company for an annual fee of $5.0 million for the first year.
• The MSA will be subject to annual review and potential adjustment by the Combined Company's board.
• The MSA will contain customary arms-length provisions for indemnification, limitations on liability, and termination.
• Blackbeard and its controlled affiliates must comply with the Combined Company's related-party transactions policy, which is expected to require prior approval from a majority of independent directors for certain transactions.
• Material transactions by New PubCo will require the affirmative vote of a majority of the board and compliance with conflict of interest policies.

Stakeholder Impact

• Shareholders: Former PBT unitholders are projected to own 58% of the new entity, while Blackbeard and affiliates will own 42%. This structure aims to align interests but also grants significant control to Blackbeard.
• Creditors: USLG's $80 million debt will become an obligation of the combined company, impacting its leverage and financial risk profile.
• Management/Employees: A Long-Term Incentive Plan is proposed to incentivize directors, officers, and employees, aligning their compensation with company performance.
• Suppliers: The Master Services Agreement with a Blackbeard affiliate establishes a significant service provider relationship, with an annual fee of $5.0 million.

Next Steps

• Negotiation and execution of definitive agreements.
• Receipt of required regulatory approvals.
• Approval by a majority in interest of PBT unitholders at a meeting where a quorum is present.
• Potential filing of a registration statement on Form S-4 with the SEC, including a proxy statement and prospectus.
• Formation of New PubCo and acquisition of assets from PBT and USLG.
• Establishment of the Board of Directors and officers for New PubCo.
• Entry into a Master Services Agreement (MSA) with a Blackbeard affiliate.
• Establishment of a Long-Term Incentive Plan (LTIP).

Key Dates

Recommendation

The proposed combination is presented as a non-binding term sheet, introducing significant uncertainty regarding its completion. While the structure offers potential benefits like public listing and asset consolidation, the assumption of debt, ongoing management fees to a related party, and Blackbeard's substantial control warrant a cautious approach. Investors should await definitive agreements and further details before making a decisive investment recommendation.

Keywords

Permian Basin Royalty Trust, US Land Guild, Blackbeard Holdings, SoftVest, Business Combination, Merger, Term Sheet, New PubCo, NYSE, Texas, Royalty Trust, Surface Estate, Mineral Interests, Master Services Agreement, Corporate Governance, SEC Filing, Schedule 13D