425: Sitio Royalties to Merge with Viper Energy in All-Equity Transaction, Creating a Dominant Permian Basin Royalty Company

Sitio Royalties Corp. and Viper Energy, Inc. have entered into a definitive agreement for an all-equity merger, which will result in Sitio stockholders owning approximately 20% of the combined entity, to be named Viper Energy, Inc.

Summary

• Sitio Royalties Corp. (Sitio) will merge with Viper Energy, Inc. (Viper) in an all-equity transaction, with a new parent company, New Cobra Pubco, Inc., becoming the ultimate parent.
• Under the terms, each share of Sitio's Class A common stock will be converted into the right to receive 0.4855 shares of New Parent Class A Common Stock.
• Sitio's Class C common stock will be cancelled without consideration, while Viper's Class A and Class B common stock will convert into New Parent Class A and Class B common stock, respectively, at a 1:1 ratio.
• Sitio Opco Units will convert into 0.4855 Viper Opco Units and 0.4855 shares of New Parent Class B Common Stock.
• Upon closing, Sitio stockholders will collectively own approximately 20% of the outstanding shares of New Parent Common Stock, and Viper stockholders will own approximately 80%.
• The combined entity will operate under the name Viper Energy, Inc. and retain Viper's existing board of directors and executive officers.
• Sitio's outstanding RSU, DSU, and PSU awards will immediately vest in full and convert into the right to receive the Sitio Pubco Merger Consideration, plus accrued cash-based dividend equivalents.
• Sitio's Board of Directors unanimously approved the merger, deeming it fair and in the best interests of its stockholders, and recommends its approval.
• The merger is subject to customary closing conditions, including stockholder approvals from both companies, HSR Act clearance, SEC effectiveness of the S-4 registration statement, and Nasdaq listing approval.
• Viper's stockholder approval has already been secured through a written consent from its Parent Majority Stockholder (Diamondback Energy, Inc. and affiliates).
• Sitio has agreed to non-solicitation provisions regarding alternative proposals, with specific exceptions for superior proposals under strict conditions, including a potential termination fee.
• The termination fee payable by Sitio to Viper is $89.6 million, reduced to $44.8 million under certain conditions (e.g., termination for a superior proposal within 45 days or from an 'Excluded Party').
• Certain Sitio equityholders, representing approximately 48% of Sitio Common Stock, have entered into voting and support agreements to approve the transaction.
• A Registration Rights Agreement will be offered to Sitio Opco Unit holders, allowing for public resale of New Parent securities.
• The transaction is intended to qualify for specific tax treatments under U.S. federal income tax purposes, including Section 351 and/or Section 368(a) reorganizations for the public company mergers, and a partnership merger for the operating company merger.

Sentiment

Score: 7

Explanation: The sentiment is positive due to the definitive merger agreement, unanimous board approvals, and the strategic rationale of combining two royalty companies. The all-equity nature and pre-secured majority shareholder approval for Viper add to the positive outlook. However, standard merger risks and the potential for a significant termination fee temper the score from being extremely high.

Positives

• The merger is an all-equity transaction, preserving capital and aligning shareholder interests in the combined entity.
• Sitio's Board of Directors unanimously determined the merger to be fair and in the best interests of Sitio and its stockholders.
• Viper's stockholder approval has already been secured, reducing a key closing condition risk.
• Sitio's equity awards (RSU, DSU, PSU) will vest in full upon closing, providing immediate liquidity or conversion for employees and directors.
• The combined entity will operate under the Viper Energy, Inc. name and retain Viper's management, suggesting continuity and established leadership.
• The transaction is structured to qualify for favorable tax treatments for U.S. federal income tax purposes, which could benefit shareholders.
• The Parent Majority Stockholder has agreed to a 90-day post-closing lock-up on certain shares, indicating commitment to the combined entity.

Negatives

• Sitio stockholders will become minority owners, holding approximately 20% of the combined company, potentially reducing their influence.
• Sitio's Class C common stock will be cancelled without consideration, which may negatively impact holders of this class.
• A termination fee of $89.6 million (or $44.8 million under specific conditions) is payable by Sitio if the merger agreement is terminated under certain circumstances, which could be a significant cost.
• The non-solicitation clause restricts Sitio's ability to seek or engage with alternative proposals, potentially limiting opportunities for a higher offer.
• The document highlights various risks that could cause actual results to differ materially, including integration challenges and failure to achieve expected benefits.

Risks

• Risk associated with Sitio's ability to obtain the required approvals from its stockholders to consummate the Mergers.
• Risks related to the timing of the closing of the Mergers, including the risk that conditions are not satisfied on a timely basis or at all, or failure to close for any other reason or on anticipated terms.
• Risk that any required regulatory approval, consent, or authorization for the Mergers is not obtained or is obtained subject to unanticipated conditions.
• Risk regarding the post-combination company's ability to successfully integrate Sitio's and Viper's businesses and technologies.
• Risk that the expected benefits and synergies of the Mergers may not be fully achieved in a timely manner, or at all.
• Risk that Sitio or Viper will not, or that the post-combination company will not, be able to retain and hire key personnel.
• Unanticipated difficulties or expenditures relating to the Mergers.
• The response of business partners and retention as a result of the announcement and pendency of the Mergers.
• Viper's ability to finance the combined company on acceptable terms or at all.
• Uncertainty as to the long-term value of the post-combination company's common stock.
• Diversion of Sitio's and Viper's management time on transaction-related matters.
• Changes generally affecting the oil and gas exploration, development, and production industry and Hydrocarbon mineral, royalty, and non-cost-bearing interest industry (including changes in commodity prices).
• New risks emerging in a very competitive and rapidly changing environment.

Future Outlook

The document outlines the strategic intent for the combined company to operate under the Viper Energy, Inc. name, with Viper's existing board and executive officers. It emphasizes the expectation that the mergers will be consummated, subject to various conditions including regulatory and stockholder approvals. The forward-looking statements highlight the anticipated benefits and synergies of the mergers, but also caution about potential risks such as integration challenges, failure to achieve expected synergies, and the ability to retain key personnel.

Management Comments

• Sitio's Board of Directors, by unanimous vote, determined that the Merger Agreement and the transactions contemplated thereby, including the Sitio Pubco Merger and the Opco Merger, are fair to, and in the best interests of, Sitio and its stockholders.
• Sitio's Board of Directors approved, adopted and declared advisable the Merger Agreement and the transactions contemplated thereby, including the Sitio Pubco Merger and the Opco Merger, and resolved to recommend that the Sitio Stockholders approve and adopt the Merger Agreement.
• Viper's Board of Directors, by unanimous vote, determined that the Merger Agreement and the transactions contemplated thereby, including the Cobra Pubco Merger, are fair to, and in the best interests of, Parent and its stockholders.
• Viper's Board of Directors approved, adopted and declared advisable the Merger Agreement and the transactions contemplated thereby, including the Cobra Pubco Merger, and resolved to recommend that the Parent Stockholders approve and adopt the Merger Agreement.

Industry Context

This all-equity merger between Sitio Royalties Corp. and Viper Energy, Inc. signifies a consolidation trend within the oil and gas mineral and royalty interest sector, particularly in the Permian Basin. The formation of a larger, combined entity aims to enhance scale and potentially operational efficiencies in a competitive and rapidly changing energy environment, aligning with broader industry movements towards consolidation for improved market positioning and cost management.

Comparison to Industry Standards

• The all-equity nature of the transaction is a common structure in large-scale mergers within the energy sector, aiming to align shareholder interests and avoid significant debt financing for the acquisition.
• The exchange ratio of 0.4855 shares of New Parent Class A Common Stock for each Sitio Class A Common Stock implies a specific valuation for Sitio relative to Viper, which would typically be assessed against recent comparable transactions in the mineral and royalty space, though no specific comparable companies or projects are detailed in this filing.
• The post-closing ownership split of approximately 80% for Viper stockholders and 20% for Sitio stockholders is typical for mergers where one company is significantly larger or contributes a greater proportion of assets/value to the combined entity.
• The unanimous board approvals from both companies, supported by financial advisor opinions (J.P. Morgan for Sitio, Moelis & Company for Viper), align with standard corporate governance practices for significant M&A transactions.
• The inclusion of customary non-solicitation clauses, termination fees, and voting support agreements from key shareholders (e.g., 48% of Sitio's common stock) are standard mechanisms to ensure transaction certainty and protect the deal from competing proposals.

Corporate Governance

Related Party Transactions

• Concurrently with the Merger Agreement, certain Sitio equityholders (Company Supporting Stockholders), collectively representing approximately 48% of Sitio Common Stock, entered into Voting and Support Agreements with Sitio and Viper, obligating them to approve the merger.
• Concurrently with the Merger Agreement, Sitio, Viper, New Parent, and affiliates of the Parent Majority Stockholder (Diamondback Energy, Inc., Diamondback E&P LLC, and Endeavor Energy Resources, L.P.) entered into the Parent Support Agreement, which includes assistance with HSR filings and a 90-day post-closing transfer restriction on certain shares.

Stakeholder Impact

• **Shareholders (Sitio):** Will receive New Parent Class A Common Stock, becoming minority owners (approx. 20%) of the combined entity. Sitio Class C holders receive no consideration. Equity awards vest and convert.
• **Shareholders (Viper):** Will become majority owners (approx. 80%) of the combined entity, retaining control and leadership.
• **Employees (Sitio):** Company Employees will receive base compensation no less favorable and substantially comparable employee benefits and target incentive compensation opportunities for 12 months post-closing. Prior service credit will be given for New Benefit Plans. Company 401(k) plan participation will be terminated, with rollover options to Parent's 401(k) plan. Severance benefits are outlined for eligible employees if terminated without cause or for good reason during the transition period.
• **Management:** Viper's existing board and executive officers will lead the combined company, indicating continuity for Viper's management and a change for Sitio's.
• **Creditors:** The Company's existing credit facility will be terminated and repaid. Cooperation is outlined for a consent solicitation or tender offer for Viper's existing notes, potentially impacting bondholders.
• **Customers/Suppliers:** The document states commercially reasonable efforts will be used to preserve existing relationships with key customers and suppliers, aiming for minimal disruption.

Next Steps

• New Parent will file a registration statement on Form S-4 with the SEC, which will include a proxy statement for Sitio and an information statement for Viper.
• Sitio will convene a meeting of its stockholders to obtain the Company Stockholder Approval.
• The parties will seek the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act).
• New Parent Class A Common Stock must be authorized for listing on the Nasdaq Stock Exchange LLC.
• Sitio will facilitate the termination and repayment of its existing credit facility and the release of related Encumbrances.
• Sitio will cooperate with Viper on a consent solicitation or tender offer for Viper's existing notes.
• Sitio will cause to be put in place and fully prepay tail insurance policies for directors and officers liability.
• New Parent will offer to enter into a Registration Rights Agreement with holders of Sitio Opco Units to facilitate public resale of securities.
• New Parent will file a Form S-8 registration statement for converted equity awards as soon as reasonably practicable after closing.

Key Dates

Recommendation

Keywords

Merger, Acquisition, Oil and Gas, Royalty Interests, Permian Basin, All-Equity Transaction, SEC Filing, Corporate Governance, Shareholder Approval, Integration, Energy Sector, STR, Viper Energy, Sitio Royalties