Practically since the day that Denbury Resources Inc. (NYSE: DNR) and Penn Virginia Corp. (NASDAQ: PVAC) announced a merger valued at $1.7 billion, investment management firm Mangrove Partners has opposed the deal. On October 29, the day following the merger announcement, Mangrove, which owns about 11.4% of Penn Virginia’s outstanding common stock, let the company’s management know that Mangrove did not support the deal.

Friday morning, Denbury and Penn Virginia separately announced that the merger agreement was terminated. Under the canceled deal, Denbury would have paid $25.86 in cash and 12.4 shares of Denbury stock for each share of Penn Virginia common stock.

The merger would have required approval by more than two-thirds of Penn Virginia shareholders and in its announcement this morning, Denbury CEO said that “difficult market condition” together with “the opposition of certain Penn Virginia shareholders” torpedoed the deal. Neither company will pay a break-up fee.

Penn Virginia CEO John A. Brooks said he believed that it is “the best interests” of the company to terminate the merger agreement with Denbury and to focus on “developing our assets and maximizing value for our shareholders as a standalone company.”

That pretty much matches up with what Mangrove was thinking months ago. According to Penn Virginia’s definitive proxy filing ahead of a scheduled April 17 vote on the merger, Mangrove listed five reasons to oppose the deal:

1. Mangrove believes that the proposed merger lacks industrial logic. Penn Virginia and Denbury pursue different means of oil production in different basins. As such, there is little overlap in the skills required to run these distinct businesses and no geographic overlap between them. As a result, the transaction does little to improve the operating or corporate cost structures of the combined business.
2. Mangrove believes that the proposed merger lacks financial logic. Mangrove believes that the transaction is dilutive to Penn Virginia’s valuation and growth rate, and believes that the combined entity will have a higher cost structure and weaker balance sheet than Penn Virginia on a stand-alone basis.
3. Mangrove believes that Denbury’s financial leverage represents and unacceptable risk for Penn Virginia Shareholders. Mangrove believes that Denbury, with its high cost structure and $2.5 billion of net debt, may become insolvent should lower oil prices persist. Mangrove believes this is an ongoing investor concern that is reflected in the mid-teens yield to worst on Denbury’s Senior Notes.
4. Mangrove believes that the shortcomings of the proposed merger are both obvious and were immediately recognized by other market participants. On the first trading day following the announcement, the common stock of Denbury Resources closed down 24% and underperformed the S&P Oil & Gas Exploration and Production Select Industry Index by over 20%. In the time since then, the underperformance of Denbury’s common stock has grown to over 50%.
5. Rather than being paid a significant premium to accept these risks, the proposed merger effectively asks Penn Virginia shareholders to accept a discount to the current market value of Penn Virginia Shares.  Penn Virginia shares have closed at a premium to the terms of the proposed merger on all but 4 trading days since the transaction was announced with an average premium of 6.8% during this period.

If the merger had been completed, Denbury would have added two seats to its eight-person board who would have been named from Penn Virginia’s independent board members. Penn Virginia CEO Brooks almost certainly would have lost his job, as would other top executives and board members, although it’s likely that golden parachutes would have softened the landings.

Penn Virginia stock traded down about 3% Friday morning to $52.60, and Denbury stock traded down just over 3% at $1.89. Penn Virginia’s 52-week range is $32.91 to $96.13 and Denbury’s is $1.39 to $6.75.

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