Hicks plans takeover, IPO of Resolute; Prospect Capital makes a play for Patriot Capital

By Stephanie N. Rotondo

Portland, Ore., Aug. 3 - Hicks Acquisition Co. I, Inc. said it will acquire privately held Resolute Natural Resources Co. in a $582 million deal.

Once the deal has been completed, Hicks plans to take the new company public.

Meanwhile, Prospect Capital Corp. announced it will take over Patriot Capital Funding Inc. The transaction is valued at substantially less than book value, making the deal attractive to Prospect's shareholders.

Good earnings from the financial world helped the equities stay firm Monday. The Dow Jones Industrial Average gained 115.03 points, or 1.25%, to close at 9,286.64, while the Standard & Poor's 500 index jumped 15.11 points, or 1.53%, to 1,002.62. The Nasdaq Composite index increased 30.11 points, or 1.52%, to 2,008.61.

Hicks plans acquisition, IPO

Hicks Acquisition announced a plan to buy Denver-based private oil and gas company Resolute Natural Resources and then take it public.

Under the terms of the deal, management of Resolute and its parent company, Natural Gas Partners, will contribute their Resolute holdings and receive 9.2 million shares, or 18%, of the new company. They will also get additional equity ownership of 1.4 million earnout shares as well as 6.9 million warrants. Hicks Acquisition's shareholders will hold an 82% interest in the new enterprise.

"The transaction value implies an enterprise value to proved reserves ratio of $11.80 per barrel of oil equivalent, and an enterprise value to 2010 estimated EBITDA multiple of 6.5x, an attractive valuation relative to the closest comparables," the companies said in a press release.

"Proceeds from the transaction will be used to repay a substantial portion of Resolute's outstanding debt. Resolute's post-transaction debt balance will be well below the industry average and will provide the company with the financial flexibility to pursue organic growth and to capitalize on acquisition opportunities."

Upon completion of the deal, the company will be renamed Resolute Energy Corp. and an application for listing will be filed with the New York Stock Exchange.

"Resolute has all of the characteristics that we believe are essential for a company to succeed in the public markets: a high quality management team with extensive experience and success in the upstream oil and gas business, a strong and flexible balance sheet, and a focused asset play in a sector poised for significant activity," Thomas O. Hicks, founder of Hicks Acquisition, said in the release. "In addition, Hicks Acquisition shareholders benefit from acquiring Resolute at a compelling valuation relative to its publicly traded peers."

Nicholas J. Sutton, chairman and chief executive officer of Resolute, will lead the combined company as CEO.

"Our operations are strategically located on properties with large, well identified quantities of oil in place, and through proven techniques such as CO2 injection and waterflooding we believe we have the opportunity to significantly increase oil production on a short-term as well as a long-term basis," Sutton said in the release.

In addition, Sutton said, the merger will result in a better positioning of Resolute "to generate strong returns for investors through the combination of its long-lived properties, a management team with extensive experience and proven results in upstream operations, the expected strong growth in demand for oil and gas, the potential for positive pricing trends, and a greatly improved balance sheet."

In addition to announcing the new deal, Hicks Acquisition said it agreed to terminate a purchase agreement with Blackstone Group to buy Graham Packaging Holdings Co., a York, Pa.-based maker of customized blow molded plastic containers. The two parties entered into the deal originally on Jan. 1, 2008 and amended the plan Jan. 27.

Hicks Acquisition's shares ended unchanged at $9.67. The Dallas-based blank check company's market capitalization is $508.14 million.

Prospect to acquire Patriot

Prospect Capital has agreed to acquire Patriot Capital in a cash-and-stock deal valued at $197 million, or 54% of equity book value.

Prospect will pay cash that will be used to repay all outstanding Patriot debt, which is expected to be around $110.05 million. Prospect will also issue 0.3992 of its own shares in exchange for each Patriot share. It is expected that Prospect will issue approximately 8.62 million shares for approximately 21.58 million Patriot shares.

In a press release announcing the deal, Prospect said it expects the transaction to be accretive to earnings while it obtains the asset for an attractive price.

"The Patriot acquisition is a perfect example of our previously stated strategy to go on offense in the current opportunity-rich marketplace in which competitors have faltered with overleveraged balance sheets," M. Grier Eliasek, president of Prospect, said in the release. "We are pursuing other move-the- needle portfolio opportunities similar to Patriot in addition to continuing our work on individual transactions."

"We are pleased to be completing with Patriot the first of what we hope will be multiple strategically compelling acquisitions to drive superior value to our shareholders," added John F. Barry III, CEO of Prospect.

In a research note published Monday, James Bellessa of D.A. Davidson & Co. reiterated his buy recommendation on the company's stock.

"We are maintaining our target price of $11, or 89% of the pro forma net asset value," the note read. "At the current share price, we are maintaining a BUY rating for the stock's total return potential, including the current 16.3% yield."

Prospect Capital's stock gained a penny, or 0.10%, to $10.03, while Patriot's equity nearly doubled. The stock closed up by $1.86, or 95.48%, at $3.81. Prospect's market cap is $416.78 million. Patriot's is $73.12 million.

Prospect is a New York closed-end investment company that lends to and invests in private and microcap public businesses.

Patriot is a specialty finance company for private equity sponsors focused on making investments in small- to mid- sized companies. It is based in Westport, Conn.

Mentioned in this article:

Hicks Acquisition Co. I, Inc. Amex: TOH

Patriot Capital Funding Inc. Nasdaq: PCAP

Prospect Capital Corp. Nasdaq: PSEC

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