Why Desert Peak Minerals And Falcon Minerals (FLMN) Are Merging In A $1.9 Billion Deal

By Amit Chowdhry ● Jan 12, 2022
  • Desert Peak Minerals and Falcon Minerals Corporation (NASDAQ: FLMN) announced a $1.9 billion merger deal. This is why they are merging.

Desert Peak Minerals and Falcon Minerals Corporation (NASDAQ: FLMN) announced today that they have entered into a definitive agreement to combine in an all-stock transaction which values the combined enterprise at $1.9 billion. And the combination is expected to create a premier mineral and royalty company at the front end of operators’ cost curves, with low leverage, an emphasis on shareholder returns, and a significant footprint in the Permian Basin and Eagle Ford.

The combined company is going to remain focused on consolidating high-quality mineral and royalty positions in the Permian Basin while optimizing its existing asset base. And it is positioned to become a leading consolidator in the space through increased scale and an experienced Board of Directors and management team with a track record of consummating large, accretive acquisitions.

The combined company is going to adopt an industry-leading governance and compensation model. And the components include a capital allocation model balanced between the return of capital to shareholders and reinvestment for growth; aligning management with shareholders through compensation and other factors; a strong balance sheet; a culture of diversity and inclusion; and a commitment to acting as responsible stewards for the environment. The company management will not receive cash incentive compensation, and the majority of equity incentive compensation will be determined by absolute total shareholder return over a three-year period.

The combined company is going to be managed by the Desert Peak team and led by Desert Peak’s current Chief Executive Officer Christopher Conoscenti. Noam Lockshin, a Partner at Kimmeridge, Desert Peak’s, and the combined company’s largest equity holder, will serve as Chairman of the Board of Directors.

Following the closing, the new Board of Directors will consist of 8 members, who are currently expected to be: Noam Lockshin, Christopher Conoscenti, Erik Belz, Allen Li, Claire Harvey, Steven Jones, Morris Clark, and Alice Gould.

Deal Highlights

— This deal positions the combined company to be a leading consolidator in the mineral and royalty space with increased scale and a Board of Directors and management team with a proven track record of successful M&A

— The combined company will have approximately 20 net wells normalized to a 5,000-foot basis that has either been spud or permitted. This inventory of line of sight wells provides visibility into attractive organic production over the next 12 months

— The projected combined production of 13,500 – 14,500 barrels of oil equivalent per day in 1H 2022, 50% – 53% of which is expected to be crude oil and approximately 73% of which is expected to be from the Permian Basin

— Capital allocation model balanced between the return of capital to shareholders and reinvestment for growth

— The shared commitment to developing industry-leading Environmental, Social and Governance programs, including a management compensation program focused on absolute total shareholder return

— Low leverage with combined net debt / annualized Q3 Adjusted EBITDA of approximately 0.8×1 at September 30, 2021

— Competitive cost structure with an objective of driving cash G&A costs per boe lower with additional consolidation with limited incremental overhead expenses

Deal Details

At the closing, Desert Peak will become a subsidiary of Falcon’s operating partnership (OpCo). And the combined company will retain Falcon’s “Up-C” structure, and Desert Peak’s equity holders will receive 235 million shares of Class C common stock, which number shall be adjusted in connection with the reverse stock split described below, with voting rights in the combined company and a corresponding number of limited partner units representing economic interests in OpCo. Desert Peak’s equity holders could receive additional equity consideration, subject to certain exceptions, to the extent that, at the closing, Desert Peak’s net debt is less than $140 million (based on a $5.15 per Falcon Class A share price).

Upon the completion of the deal, assuming no adjustments to the equity consideration for Desert Peak’s net debt, Desert Peak’s equity holders will own approximately 73% and existing Falcon shareholders will own approximately 27% of the combined company. And based on the closing price of Falcon’s Class A common stock of $5.45 on January 11, 2022, the combined company, including the value of OpCo limited partnership units not owned by Falcon, will have an initial equity market capitalization of approximately $1.76 billion and an enterprise value of approximately $1.92 billion, including Class A and Class C common stock.

Following the closing of the transaction, subject to the approval of Falcon’s shareholders, Falcon will execute a 1-for-4 reverse stock split. And after giving effect to the reverse stock split and the proposed merger, the aggregate number of shares of Class A and Class C common stock outstanding is expected to be approximately 80 million shares.

Transaction Committee

The combination was approved by a Transaction Committee of Falcon’s Board of Directors comprised solely of disinterested directors, by the Falcon Board, and by Desert Peak’s equity holders.

The Falcon Board had established a Transaction Committee, comprised of independent and disinterested directors Claire Harvey, Chair of the Falcon Board, William Anderson and Steven Jones, for the purpose of evaluating certain strategic alternatives in which affiliates of Blackstone may have an interest, including any potential combination with Desert Peak.

The deal is expected to close in the second quarter of 2022, subject to the approval of Falcon shareholders, certain regulatory approvals and satisfaction of other customary closing conditions. Blackstone, which currently owns 40.6% of the voting power of Falcon, has entered into a support agreement obligating it to vote in favor of the transaction.


“We are excited to announce our merger with Falcon, which brings together two premier liquids-weighted and geographically focused asset bases to create a leading public minerals company with a strong growth trajectory. We believe the ownership of Permian minerals and royalties is trending toward larger-scale, more efficient institutional ownership. Our strategy is to be the leading consolidator of these high-quality Permian assets. We believe our scale is a clear strategic advantage in the minerals business as we are able to drive down fixed costs per unit of production with each acquisition, enhancing our cash margins. We would like to thank the Board of Directors, management, and employees of Falcon for all of their efforts and partnership as we have worked towards this announcement.”

— Chris Conoscenti, Chief Executive Officer of Desert Peak

“As we have previously communicated to our shareholders, we believe scale matters in the minerals business, as it enhances the ability to drive greater consolidation, improves access to capital, and reduces volatility caused by asset concentration. We are proud of the business our management team and employees have built, and we are excited to partner with Desert Peak to provide our shareholders with a significant increase in scale and exposure to a large and diverse base of premier assets across the Permian Basin.”

— Bryan Gunderson, President and Chief Executive Officer of Falcon

“Over the last several months, with the assistance of independent financial and legal advisors, Falcon has conducted a thorough evaluation of a number of alternatives to maximize shareholder value. Following our comprehensive review, we believe that a combination with Desert Peak represents the best opportunity to maximize value for Falcon’s shareholders.”

— Claire Harvey, Chair of the Falcon Board and the Transaction Committee

Disclaimer: This content is intended for informational purposes. Before making any investment, you should do your own analysis.