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In energy deals, bid early and bid high
NEW YORK |
NEW YORK (Reuters) - At the hottest point of last decade's New York real estate market, it was not uncommon for buyers to bid above the list price of an apartment to ensure that they would end up with the space.
A similar strategy has been seen in recent energy deals, as many bidders have looked to pre-empt auction processes with an early bid, in hopes of keeping competitors out of the process.
Indeed, in the current climate for energy deals the best strategy may not be to wait for an auction process to start, but rather, to bid first and bid high.
Several recent energy deals have had auction processes pre-empted by a high bid, according to industry sources. These include BP Plc's (BP.L) $7 billion deal for a package of Devon Energy (DVN.N) assets, Consol Energy's (CNX.N) $3.5 billion purchase of Dominion Resources' (D.N) Appalachian natural gas properties and Sinopec's $4.65 billion bid for ConocoPhillips' (COP.N) stake in a Canadian oil sands project.
Bankers said the trend is a recognition that it has become a sellers' market for attractive energy assets, and that in many cases it makes sense for buyers to offer a very full price for those assets if it ensures a deal.
"There is a real sense of optimism around oil prices at the moment and we've seen asset and corporate valuations on the oil side continue to strengthen," said Jonathan Cox, head of Energy M&A at Deutsche Bank, who noted that most of these assets would have drawn significant interest regardless of the current commodity cycle.
The energy industry has been among the hottest sector for mergers and acquisitions, with more than $130 billion in deals since the beginning of the year.
Energy companies have been eager to prove that they are replacing their production. Moreover, many of the largest oil companies have been criticized in recent years for weak exploration results, so companies have been eager to prove that they are replacing their production.
WHAT'S IN IT FOR SELLERS?
Another energy investment banker, who spoke on the condition of anonymity, said that the strengthening oil prices meant that buyers and sellers were more aligned in their views of valuation than in previous years.
The banker attributed the rising frequency of pre-emption to the rich prices available. He said that sellers tend to have a target price for an asset, and if a pre-emptive bid meets or exceeds that target, sellers can avoid the headache of running an auction.
"If a seller is fairly comfortable that they're getting a good price, it can make it in everybody's interest to go exclusive," said David Kirkland, a partner at law firm Baker Botts in Houston.
Kirkland said by working with one bidder, sellers get the deal done quickly. They can also keep certain information private by limiting the number of companies doing due diligence.
A shortened process can also limit the possibilities of leaks, which helps to prevent employees and customers from worrying about an impending sale.
Commodity prices could also be a driver toward agreeing to a pre-emptive deal for sellers -- auction processes can take months and there is no guarantee that the value of oil and natural gas will stay high over that period.
(Reporting by Michael Erman, editing by Matthew Lewis)
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