Energy Transfer Partners LP ETP recently inked an agreement to merge with its general partner Energy Transfer Equity LP ETE in an all-stock deal. This marks a long-awaited move by the pipeline giant in the energy MLP industry.
Post the announcement of the merger, shares of Energy Transfer Partners have jumped 14% to close at $24.18 on Aug 2. On the other hand, Energy Transfer Equity stock has also moved up more than 2.8% to close at $18.95 in the same period. While Energy Transfer Partners currently carries a Zacks Rank #3 (Hold), Energy Transfer Equity holds a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 (Strong Buy) Rank stocks here.
Per the deal, Energy Transfer Equity plans to exchange 1.28 shares of its common stock for each unit of Energy Transfer Partners. This represents a price of $23.59 per unit based on Energy Transfer Equity's closing price of $18.43 on Aug 1. Notably, Energy Transfer Equity has rolled up its MLP for around 11% premium, based on Energy Transfer Partners' closing unit price of $21.21 as of Aug 1.
Subject to satisfactory closing conditions and unitholders' approval, the transaction deal is expected to complete in the fourth quarter of 2018, post which the combined entity is estimated to be worth around $90 billion.
In the last reported quarter, Energy Transfer Partners' CEO hinted that the merger would prove to be a strategic move amid the tax ruling. With Energy Transfer Partners incurring huge sums of money to finance its expansion projects along with hefty incentive distribution rights (IDRs) payments to its general partner, the merger was a much required one. The deal is immediately accretive to Energy Transfer Equity's distributable cash flow per unit.
The deal seems to be quite a prudent move, leading to several advantages for the Energy Transfer franchise. The move will simplify the organizational structure and boost the credit profile of the partnership, along with improving transparency of the investors. The merger seems to improve the combined partnership's cost of capital by the elimination of IDRs of Energy Transfer Equity in its MLP. Elimination of IDRs will incentivize the combined partnership to manage operations efficiently, tap acquisition opportunities and improve cash generation from investments.
The deal will also help in enhancing the distribution coverage as well as internally generated cash flows, which will help it provide more financial flexibility in investing in growth projects. The agreement will reduce the combined partnership's leverage and reduce the requirement of equity issuances to fund growth projects.
Energy Transfer's Series of Consolidation
Energy Transfer Partners acquired Sunoco Inc. in 2012 for $5.3 billion, to penetrate further in the crude oil transportation business. With the acquisition, Energy Transfer Partners will also gain interest in Sunoco Logistics Partners L.P, Sunoco's MLP. Last year, Energy Transfer Partners completed its merger with Sunoco Logistics Partners LP as part of the simplification strategy. Energy Transfer also acquired the remaining units of PennTex Midstream Partners LP.
Midstream Merger Deals Engulf the Industry
A flurry of merger and acquisition deals hit the energy MLP industry this year. In February, NuStar Energy LP and its parent NuStar Energy Holdings announced their decision to merge into a single entity. Following this, Tallgrass Energy inked a deal to acquire its pipeline subsidiary, Tallgrass Energy Partners.
Notably on Mar 15, The Federal Energy Regulatory Commission (FERC) declared a major tax overhaul, barring the pipelines owned by MLPs from including their investors' income tax allowance in their cost of service fees. The regulatory body ruled that the interstate oil and natural gas pipelines owned by MLPs will no longer be able to avail a credit for income taxes that they do not pay. The FERC ruling was definitely negative for MLPs as the tariff rates will fall for certain pipelines.
In a bid to simplify their corporate structure amid concerns emerging from the tax policy change, three leading energy companies, namely Williams Companies Inc. WMB , Enbridge Inc. ENB and Cheniere Energy, Inc. announced merger deals in May to snap up the remaining stake of their midstream subsidiaries.
Other Firms to Jump on the Bandwagon
Other notable entities that can follow the suit of acquiring their MLPs include TransCanada Corporation and Plains GP Holdings. Canadian pipeline giant TransCanada has long benefited from dropping down assets to its master limited partnership, TC Pipelines, in exchange of cash.
However, the tax overhaul has weighed heavily on the MLP's valuation, distribution and access to capital. Hence, TC Pipelines has ceased to remain a viable funding option for TransCanada. Thus, the best alternative left for TransCanada to simplify its corporate structure, improve the cost of capital and retain cash flow is to snap up its pipeline subsidiary.
Similarly, it also makes sense for Plains GP Holdings to buy Plains All American Pipeline LP, which had already taken its first step to ease the organizational structure through IDR simplification deal in 2016. Merger of the two entities would only be the next logical step to reduce the cost of capital, making it easier to access the funds required for growth projects.
It's likely that more such deals will be signed in the coming years, simplifying the corporate structure of the firm, and making the midstream industry more attractive for the investors.
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