Houston Exploration intends to enter in a Distribution Agreement with KeySpan Corporation (NYSE: KSE) pursuant to which Houston Exploration will redeem and cancel 10,800,000 shares of its common stock owned by KeySpan, in exchange for all of the stock of Seneca-Upshur Petroleum, Inc., a wholly-owned subsidiary of Houston Exploration. The share price value that KeySpan will receive for its 10,800,000 shares in the exchange transaction is equal to $41.57 per share. To fund cash in an amount calculated to equalize the value of the stock being exchanged, Houston Exploration is offering 6,200,000 shares of its common stock and will borrow an additional $107 million under its revolving bank credit facility.
At the closing of the offering, Houston Exploration intends to contribute substantially all of the net proceeds of the offering, $107 million in cash borrowed under its revolving bank credit facility, and all of its Appalachian Basin assets and related liabilities (which the parties have agreed are worth $60 million) to Seneca-Upshur. Houston Exploration will then convey to KeySpan all of the shares of Seneca-Upshur, in exchange for 10,800,000 shares of its common stock held by KeySpan, which will be cancelled by Houston Exploration.
The underwriters have been granted an option by Houston Exploration to purchase an additional 930,000 shares to cover over-allotments. The first 310,000 shares of the underwriters' over-allotment option must be exercised before closing of the offering. The option on the remaining 620,000 shares may be exercised at any time within 30 days. If the over-allotment option is exercised in full, Houston Exploration will receive an additional $42.9 million of net proceeds. If any portion of the option is exercised prior to the closing of the offering, Houston Exploration will contribute a portion of the net proceeds from such exercise to Seneca-Upshur, and additional Houston Exploration shares will be redeemed from KeySpan in the exchange limited to a maximum of 310,000 additional redeemed shares. The remainder of the net proceeds from the exercise of the over-allotment option will be used to reduce borrowings under its revolving bank credit facility, including borrowings made in connection with the exchange.
The net effect of the offering and the exchange is the redemption and cancellation of 4,600,000 shares of Houston Exploration's common stock, the disposition of its Appalachian Basin assets, which represented approximately 3 percent of its production as of March 31, 2004, and a $107 million increase in outstanding indebtedness. Upon completion of the offering and the exchange, KeySpan's ownership of Houston Exploration's outstanding common stock would decrease from approximately 54.5 percent to approximately 24.1 percent. This does not include the effects of any exercise of the over- allotment option.
A registration statement related to the public offering has been filed with and declared effective by the Securities and Exchange Commission, and a prospectus supplement related to the public offering has been filed with the Securities and Exchange Commission. When available, copies of the prospectus supplement relating to the offering may be obtained from the offices of Lehman Brothers Inc., c/o ADP Financial Services, Integrated Distribution Services, 1155 Long Island Avenue, Edgewood, New York 11717, or Goldman, Sachs & Co., c/o Prospectus Department, 85 Broad Street, New York, New York 10004.
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