With its planned $4.3-billion acquisition of Berry Petroleum Co., Linn Energy LLC has launched its strategy for CCorp acquisitions and elevated its opportunity set of potential transactions, implementing a plan started this past October with its LinnCo LLC initial public offering.

Describing the Berry Petroleum acquisition, announced in late February, as “groundbreaking,” Linn Energy chief executive and chairman Mark Ellis said the transaction “represents the first-ever acquisition of a public C-Corp by an upstream LLC or MLP.” The acquisition is expected to be tax-free to Berry shareholders, and closing is expected by June 30, 2013.

Terms of the merger agreement call for 1.25 common shares of LinnCo to be issued for each common share of Berry. Based on LinnCo’s closing price as of February 20, 2013, this translates into just under $46.25 per Berry share, or a premium of 19.8% to Berry’s closing price on the same date. Total consideration of $4.3 billion includes assumption of $1.7 billion of Berry debt.

The transaction is to be undertaken in two steps, the first being a stock-for-stock merger under the terms described above. Berry will be converted into a limited liability company, or LLC. LinnCo will then contribute the Berry assets to Linn Energy in exchange for units in the latter. This allows Linn Energy to own the Berry assets in a pass-through entity without any immediate payment of tax.

“It’s a tax-free exchange to Berry, which is great,” said Linn Energy’s chief financial officer, Kolja Rockov, on the conference call announcing the deal. “It allows us to take C-Corp assets and put those assets into our pass-through entity, and it doesn’t generate any material tax impact to LinnCo shareholders.”

Last year, Linn Energy made two asset acquisitions, each exceeding $1 billion, involving BP LLC’s Jonah and Hugoton fields in Wyoming and Kansas, respectively. But its ability to pursue C-Corp acquisitions—now validated by the use of the LinnCo currency to structure the Berry merger—represents a step-change in the acquisitions Linn can consider.

“We believe LinnCo is a game-changer for the company,” said Ellis.

With C-Corps in the E&P sector trading at lower multiples than upstream master limited partnerships (MLPs), Linn is well-positioned to exploit the valuation gap. Prior to the Berry deal being announced, for example, Wells Fargo research analysts noted that Linn Energy was trading at a multiple of 8.3 times 2013 EBITDA (earnings before interest, depreciation and amortization), a premium to the 5.5 EBITDA multiple that the market accorded Berry.

With Berry being acquired at 6.1 times 2013 EBITDA, the arbitrage is wide enough to provide a healthy takeout premium for Berry shareholders, while also generating accretion for unitholders of Linn Energy. And at 6.1 times EBITDA, the C-Corp transaction compares favorably with the average 8.2 times EBITDA multiple paid by Linn Energy for assets that it acquired in 2012, as well as the average 7.0 times EBITDA paid by upstream MLPs for acquisitions over $400 million in 2012, according to the Wells Fargo analysts.

In addition, whereas questions may previously have arisen over digesting acquisitions of this step-change larger size, the balance sheet is now far from extended following the Berry acquisition. In fact, Ellis points out, the reverse is true. The acquisition is funded with LinnCo stock, and debt-to-EBITDA is targeted to improve to around 3.5 times following the merger.

“Previously, you would have to balance the volume of an acquisition with how much equity you could raise in the marketplace and the cost associated with doing that. What’s great about this transaction, and the potential for future transactions, is you are able to do it as 100% stock consideration,” Ellis said. “And if we are able to effect more C-Corp transactions that are primarily stock in consideration, I would expect that the debt metrics just continue to improve as we get larger.”

With the equity infusion strengthening Linn’s balance sheet, Ellis sees opportunities to refinance Berry debt at potentially lower rates, offering further upside.

“It’s a huge opportunity for us in the long term; in the short term, we don’t feel compelled to do anything quickly,” Ellis said. “But the credit quality of Linn clearly improves as a result of these transactions, and we want to make that known to the marketplace, known to the rating agencies, and ultimately, yes, I think there will be interest cost savings.”

With Linn’s financial firepower intact following the transaction, Ellis indicates a readiness to replicate the strategy for C-Corp acquisitions, describing it as “a repeatable process.” No prerequisite apparently exists to close on the Berry transaction before potentially announcing another acquisition. Restricting factors are more likely to be simply the time needed to integrate the Berry assets, and the normal process undertaken by Linn in vetting companies that might satisfy its appetite for long-lived, low-decline-rate properties with development opportunities.

For Linn, “Berry’s high-margin, low-decline asset base is an excellent fit for our current portfolio,” Ellis said.

The Berry reserves will increase Linn’s presence in California, the Permian, East Texas and the Rocky Mountains, as well as add a new area in the Uinta Basin. Pro forma, estimated prove reserves will grow by 34%. With oil comprising approximately 75% of Berry’s reserves, the liquids component of the combined company’s reserves will grow to 54%, up from Linn’s prior 46%. The Berry assets currently produce about 40,000 barrels of oil equivalent per day, with a decline rate of around 15%, which will help lower the combined company’s decline rate to “around the low 20s,” according to Rockov.

Linn management says the Berry transaction is expected to be “highly accretive” to distributable cash flow per unit, estimating accretion at more than $0.40 per unit in the first full year following the deal closing. In third-quarter 2013, after the transaction closes, the company expects to increase cash distributions and dividends, subject to board approval, to $0.77 per quarter, or to an annualized rate of $3.08, for both Linn securities. Assuming a closing of June 30, 2013, or earlier, management projects a coverage ratio for the second half of 2013 of 1.2 times, including the expected distribution and dividend increases.

An interesting development in terms of the increasing market appreciation of the LinnCo currency (LNCO) is reflected in its trading relationship with its companion security, Linn Energy (LINE). At the end of last October, the month when LNCO was launched, it traded at a 7.5% discount to LINE. This had moved up to a 2.6% premium by the end of January 2013 and a 2.8% premium at the end of February, the month in which the Berry merger was announced. The improving relationship is seen as auguring LinnCo’s greater use as a currency for acquisitions, as in the Berry deal.

Some speculation has centered on which other E&P companies might be attractive to Linn. A sampling of buyout candidates includes: Approach Resources Inc.; Denbury Resources Inc.; Kodiak Oil & Gas Corp.; Oasis Petroleum Inc.; Resolute Energy Corp.; SM Energy Co.; and Whiting Petroleum Corp. Of note in the Berry buyout, the Berry family retained a sizable ownership in the E&P. The expected tax-free nature of the transaction, coupled with the tax-advantaged distributions of the LinnCo currency received in lieu of Berry stock, are seen as likely factors in bringing the transaction to fruition.

Potential C-Corp activity does not, however, mean an end to Linn’s stock-in-trade asset acquisitions.

“From an asset viewpoint, we have always said we felt that there was anywhere from $20 billion to $30 billion of assets that will come to the market over the course of the next 18 months,” Rockov said. “And we still feel confident that will happen. We might have a little bit of a slow start this year from an asset standpoint, but I think it will pick up as we go through the year.”

While other upstream MLPs could try to emulate the LinnCo structure for C-Corp acquisitions, it is viewed as unlikely, because of tax considerations, according to the Wells Fargo analysts. In particular, LinnCo is advantaged by Linn Energy being the only upstream MLP generating a tax deferral shield equal to or in excess of 100%. Because 100% of the distributions received from Linn Energy are tax deferred, actual taxes paid by LinnCo are very low (2% to 5% on an ongoing basis), even though it is subject to corporate level taxation. The above-average tax shield reflects Linn Energy’s substantial drilling budget aimed at achieving organic growth and acquisitions, versus other MLPs’ acquisitions-only strategy.

But if Linn lacks comparable competition from its MLP peers, as it continues down its dual path of asset and C-Corp acquisitions, what about E&Ps themselves? Could an E&P, for example, set up a comparable structure and distributions?

Rockov cautioned this was not a “definitive” answer, but: “I think it is easier for them to achieve the tax-free structure by merging with LinnCo than it is to create your own MLP. I think that’s one of the key strategic advantages to what we have here.”