Item 1.01
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Entry into a Material Definitive Agreement.
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Merger Agreement
On December 12, 2016,
Patterson-UTI
Energy, Inc., a Delaware corporation
(Patterson-UTI),
entered into an Agreement and Plan of Merger (the Merger Agreement) with Seventy Seven Energy Inc., a Delaware corporation (SSE), and Pyramid Merger Sub, Inc., a
Delaware corporation and a direct, wholly owned subsidiary of
Patterson-UTI
(Merger Sub), pursuant to which
Patterson-UTI
will acquire SSE in exchange for
newly issued shares of
Patterson-UTI
common stock, par value $0.01 per share
(Patterson-UTI
Common Stock). The Merger Agreement provides that, upon the terms
and subject to the conditions set forth therein, Merger Sub will be merged with and into SSE, with SSE continuing as the surviving entity and a wholly owned subsidiary of
Patterson-UTI
(the
Merger).
Under the terms and conditions of the Merger Agreement, at the effective time of the Merger (the Effective
Time), each issued and outstanding share of SSE common stock, par value $0.01 per share (SSE Common Stock), will be converted into the right to receive a number of shares of
Patterson-UTI
Common Stock equal to the exchange ratio, as described in the next sentence. The exchange ratio will be equal to 49,559,000 shares of
Patterson-UTI
Common Stock, divided by the total number of shares of SSE
outstanding or deemed outstanding immediately prior to the effective time (including, among other things, shares issued upon exercise of warrants to acquire SSE Common Stock and restricted stock units that are exercised or deemed exercised);
provided
that, in the event that any Series A warrants to acquire SSE Common Stock are forfeited or net settled, such 49,559,000 shares of
Patterson-UTI
Common Stock will be reduced by a number equal to
(i) the aggregate exercise price for the warrants that are forfeited or net settled, divided by (ii) the volume weighted average price of a share of
Patterson-UTI
Common Stock for the 10 consecutive
trading days immediately preceding the 3rd business day prior to the closing. In no event will
Patterson-UTI
issue more than 49,559,000 of its shares as Merger Consideration. Annex A of the Merger
Agreement sets forth an illustrative calculation of the Exchange Ratio.
In connection with the Merger, each SSE restricted stock unit
award granted prior to December 12, 2016 that is outstanding as of the Effective Time will fully vest immediately prior to the closing of the Merger (the Closing) and be treated as shares of SSE Common Stock and receive the Merger
Consideration in respect of each share of SSE Common Stock subject to the award. In addition, at the Effective Time, each SSE restricted stock unit award granted on or following December 12, 2016 will be assumed by
Patterson-UTI
and converted into a restricted stock unit award covering a number of shares of
Patterson-UTI
Common Stock equal to (i) the number of shares of SSE Common
Stock subject to the award immediately prior to the Effective Time, multiplied by (ii) the exchange ratio (discussed above), rounded to the nearest whole share.
SSE and
Patterson-UTI
have agreed, subject to certain exceptions, to certain prohibitions (the
non-solicitation
provisions) not to directly or indirectly solicit, initiate, facilitate, knowingly encourage or induce or take any other action that could be reasonably expected to lead to the making,
submission, or announcement of competing acquisition proposals. With respect to competing acquisition proposals, subject to certain exceptions, both parties are also prohibited from furnishing any nonpublic information, engaging in discussions or
negotiations, entering into a letter of intent or similar document, or otherwise approving, endorsing or recommending a competing proposal. SSE and
Patterson-UTI
have also agreed to cease all existing
discussions with third parties regarding any competing acquisition proposals.
Notwithstanding the prior paragraph, either party may,
subject to the terms and conditions set forth in the Merger Agreement, furnish information to, and engage in discussions and negotiations with, a third party that makes an unsolicited competing acquisition proposal if the board of directors of such
party determines in good faith, after consultation with its outside counsel and its outside financial advisor, that such competing acquisition proposal is or is reasonably likely to result in a superior proposal, and that the failure to take such
action would be inconsistent with its fiduciary duties under applicable law. Prior to the time that the relevant stockholders approve the Merger Agreement, the board of directors of each of SSE and
Patterson-UTI
may change its recommendation with respect to the adoption of the Merger Agreement (in the case of SSE) or the
Patterson-UTI
Stock Issuance (in the case of
Patterson-UTI),
in each case, in response to a superior proposal or an intervening event if the board of directors determines in good faith, after consultation with its outside counsel, that, among other
things, the failure to do so would be inconsistent with its fiduciary duties under applicable law and complies with certain other specified conditions.
1
The Merger Agreement contains representations and warranties from both
Patterson-UTI
and SSE, and each party has agreed to covenants, including, among others, covenants relating to (i) the conduct of its business during the interim period between the execution of the Merger
Agreement and the Effective Time, (ii) the obligation to use reasonable best efforts to cause the Merger to be consummated and to obtain expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(HSR Act), (iii) the obligation of SSE to call a meeting of its stockholders to approve the Merger Agreement and (iv) the obligation of
Patterson-UTI
to call a meeting of its stockholders to
approve the
Patterson-UTI
Stock Issuance.
The completion of the Merger is subject to satisfaction
or waiver of certain closing conditions, including but not limited to: (i) adoption of the Merger Agreement by SSEs stockholders and approval of the issuance of
Patterson-UTI
Common Stock as Merger
Consideration (the
Patterson-UTI
Stock Issuance) by
Patterson-UTIs
stockholders, (ii) the expiration or termination of any waiting period under
the HSR Act, (iii) the absence of any law, order, decree or injunction prohibiting the consummation of the Merger, (iv) the effectiveness of the registration statement on Form
S-4
pursuant to which
the shares of
Patterson-UTI
Common Stock to be issued as Merger Consideration will be registered, (v) approval for listing on the Nasdaq Global Select Market of the shares of
Patterson-UTI
Common Stock to be issued in connection with the Merger subject to official notice of issuance, (vi) subject to specified materiality standards, the accuracy of the representations and warranties
of each party, (vii) compliance by each party in all material respects with its covenants, (viii) receipt of a tax opinion from each partys counsel, dated as of the closing date, to the effect that the merger will be treated as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, (ix) the absence of material losses (as defined in the Merger Agreement) during the interim period between the date of
execution of the Merger Agreement and the Effective Time that exceed, or would reasonably be expected to exceed, individually or in the aggregate, $100 million with respect to SSE and its subsidiaries, and $300 million with respect to
Patterson-UTI
and its subsidiaries, in each case, net of certain insurance or indemnification proceeds and certain other deductions, and (x) an amount of net debt (as defined in the Merger Agreement) as of the
closing date not exceeding $500 million with respect to SSE and its subsidiaries, and $725 million (not including debt incurred to refinance SSEs debt or pay for the expenses of the transaction) with respect to
Patterson-UTI
and its subsidiaries.
Upon termination of the Merger Agreement, if the stockholders of
either party does not to provide the requisite approval, such party must reimburse the expenses of the other party, capped at $7,500,000. In certain circumstances, including if the board of directors of SSE changes its recommendation or if the
Merger Agreement is terminated in certain circumstances and SSE enters into an alternative acquisition transaction within 12 months of termination, SSE may be required to pay
Patterson-UTI
a termination fee of
$40,000,000. Patterson-UTI
may be required to pay SSE a termination fee of $100,000,000 in certain circumstances, including if the board of directors of
Patterson-UTI
changes its recommendation as a result of a Superior Parent Proposal or if the Merger Agreement is terminated in certain circumstances and
Patterson-UTI
enters into certain types of alternative acquisition transactions within 12 months of termination. In certain other circumstances,
Patterson-UTI
may be required to pay SSE a termination fee of $40,000,000. In
no event will either party be entitled to receive more than one expense reimbursement payment or more than one termination fee payment to which either party is entitled.
The foregoing description of the Merger Agreement is only a summary, does not purport to be complete, and is subject to, and qualified in its
entirety by reference to, the Merger Agreement, a copy of which is filed as Exhibit 2.1 to this Current Report on Form
8-K
and is incorporated herein by reference.
Commitment Letter
In connection
with the Merger,
Patterson-UTI
entered into a financing commitment letter (the Commitment Letter) with Canyon Capital Advisors LLC for a senior unsecured bridge facility in an aggregate principal
amount not to exceed $150 million (the Bridge Facility), for the purposes of repaying or redeeming certain of SSE and its subsidiaries indebtedness and to pay related fees and expenses. Any undrawn commitments under the Bridge
Facility will automatically terminate on the closing date of the Merger. The Bridge Facility will be subject to representations, warranties and covenants that, subject to certain agreed modifications, will be substantially similar to
Patterson-UTIs
existing senior unsecured revolving credit agreement.
2
The funding of the Bridge Facility is subject to
Patterson-UTIs
compliance with customary terms and conditions precedent as set forth in the Commitment Letter, including, among others: (i) the execution and delivery by
Patterson-UTI
of definitive documentation consistent with the Commitment Letter and (ii) that the Merger shall have been, or substantially simultaneously with the funding under the Bridge Facility shall be,
consummated in accordance with the terms of the Merger Agreement.
Patterson-UTI
expects that
aggregate proceeds of the Bridge Facility, together with the available cash of
Patterson-UTI
and borrowings under the existing senior unsecured revolving credit agreement will be sufficient to consummate the
Merger in accordance with the terms of the Merger Agreement and to pay all related fees and expenses payable in connection therewith. The foregoing description of the Commitment Letter is only a summary, does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the Commitment Letter, a copy of which is filed as Exhibit 10.1 to this Current Report on Form
8-K
and incorporated herein by reference.
Voting Agreements
On
December 12, 2016, concurrently with the execution of the Merger Agreement, certain affiliates of Axar Capital Management, LLC, Blue Mountain Capital Management, LLC and Mudrick Capital Management, L.P. (each, a Voting Agreement
Stockholder), which, together, hold approximately 61% of the outstanding shares of SSE Common Stock, entered into Voting and Support Agreements (the Voting Agreements) with
Patterson-UTI
in
connection with the Merger Agreement.
Among other things, each Voting Agreement requires that the Voting Agreement Stockholder that is
party to such Voting Agreement to vote or cause to be voted all SSE Common Stock owned by such Voting Agreement Stockholder in favor of the Merger Agreement and against alternative transactions. In the event that SSEs board of directors
changes its recommendation that SSE stockholders adopt the Merger Agreement, all of the Voting Agreement Stockholders, taken together, will only be required to vote shares that, in the aggregate, represent 39.99% of the outstanding SSE Common Stock
in favor of the adoption of the Merger Agreement, with the Voting Agreement Stockholders being able to vote the balance of their shares of SSE Common Stock on such matter in each Voting Agreement Stockholders sole discretion.
Subject to certain exceptions, each Voting Agreement also contains prohibitions applicable to each Voting Agreement Stockholder that are
consistent with the
non-solicitation
provisions of the Merger Agreement. Pursuant to each Voting Agreement, each Voting Agreement Stockholder is restricted from selling or transferring SSE Common Stock owned
by such Voting Agreement Stockholder, subject to certain exceptions.
Except in certain instances, the expiration date of each Voting
Agreement will terminate upon the earliest to occur of (i) the consummation of the Merger, (ii) six months following the date of termination of the Merger Agreement, if such termination is a result of (a) a change in recommendation by
SSEs board of directors, (b) SSE failing to include the recommendation of its board of directors in the joint proxy statement in breach of the Merger Agreement, (c) a material breach by certain of SSEs affiliates of the
non-solicitation
covenant in the Merger Agreement, (d) a material breach by SSE of its covenant related to the SSE special meeting, or (e) if the requisite approval of adoption of the Merger Agreement from
SSE stockholders is not obtained, (iii) the termination of the Merger Agreement if such termination is not made pursuant to (ii) above, and (iv) with respect to each Voting Agreement Stockholder, the entry into, without the prior
written consent of such Voting Agreement Stockholder, any decrease in or change in composition of the Merger Consideration.
Each Voting
Agreement restricts the Voting Agreement Stockholders from transferring
Patterson-UTI
Common Stock for the period commencing on the closing date of the Merger Agreement and ending on the earlier to occur of:
(i) 30 days following the date that
Patterson-UTI
raises $400 million in gross proceeds through equity issuances or the incurrence of long-term debt and (ii) 90 days following the closing date of the
Merger; provided, that if the
30-day
period referred to in clause (i) expires prior to the closing date of the Merger, then the Voting Agreement Stockholders will not be subject to any post-closing
transfer restrictions with respect to
Patterson-UTI
Common Stock.
3
The foregoing description of each Voting Agreement is only a summary, does not purport to be
complete, and is subject to, and qualified in its entirety by reference to, such Voting Agreement. The Voting Agreements are filed as Exhibit 10.2 through Exhibit 10.4 to this Current Report on Form
8-K
and
are incorporated herein by reference.
* * *
The Merger Agreement, Commitment Letter and the Voting Agreements and the above descriptions have been included to provide investors and
security holders with information regarding the terms of the Merger Agreement, Commitment Letter and Voting Agreements. They are not intended to provide any other factual information about SSE,
Patterson-UTI
or their respective subsidiaries, affiliates or equity holders. The representations, warranties and covenants contained in the Merger Agreement, Commitment Letter and Voting Agreements were made only for purposes of those agreements and as of
specific dates; were solely for the benefit of the respective parties to such agreements; and may be subject to limitations agreed upon by the parties, including being qualified by confidential disclosures made by each party to the other for the
purposes of allocating contractual risk between them that differ from those applicable to investors. Investors should be aware that the representations, warranties and covenants or any description thereof may not reflect the actual state of facts or
condition of SSE,
Patterson-UTI
or any of their respective subsidiaries, affiliates, businesses or equity holders. Moreover, information concerning the subject matter of the representations, warranties and
covenants may change after the date of the Merger Agreement, Commitment Letter and Voting Agreements, which subsequent information may or may not be fully reflected in public disclosures by SSE or
Patterson-UTI.
Accordingly, investors should not rely on the representations and warranties in the Merger Agreement, Commitment Letter and Voting Agreements as characterizations of the actual state of facts or
condition of SSE,
Patterson-UTI
and their respective affiliates and subsidiaries.