GLOP - GasLog Partners: Buyout Offer Likely To Be Sweetened By The Parent - Buy

Summary

• Not surprisingly, parent GasLog Ltd. is trying to take out the partnership GasLog Partners LP on the cheap.
• Proposed buyout value of $7.70 appears to be almost 50% below the firm's estimated NAV.
• There are expectations for the conflicts committee to negotiate substantially improved deal terms with a value of at least $10 per common unit.
• Even a buyout price in the low double-digits would still represent a major bargain for the parent, and with persistent market tailwinds from recent geopolitical events, there's a strong incentive for GasLog to get a deal done.
• Despite the common units already trading above the aggregate $7.70 deal value, investors should consider joining this promising buyout speculation.

Earlier this week, parent GasLog Ltd. ("GasLog") submitted an unsolicited, non-binding buyout proposal to acquire all of the outstanding common units of LNG carrier operator GasLog Partners LP (GLOP) not already beneficially owned by GasLog:

In connection with the proposed transaction, each Common Unit would receive overall value of $7.70 per Common Unit in cash, consisting in part of a special distribution by the Issuer of $2.33 per Common Unit in cash to be distributed to the Issuer’s unitholders immediately prior to the closing of the proposed transaction and the remainder to be paid by GasLog as merger consideration at the closing of the proposed transaction. (...)

The Partnership’s board of directors has authorized its conflicts committee, consisting only of non-GasLog affiliated directors, to retain advisors and to review, evaluate, negotiate and accept or reject the proposed transaction. GasLog’s proposal is non-binding and is subject to the negotiation and execution of mutually acceptable definitive documentation. There can be no assurance that any definitive documentation will be executed or that any transaction will materialize.

Like most limited shipping partnerships, GasLog Partners was established to fund parent and general partner GasLog Ltd., but after cutting distributions all the way down to $0.01 per common unit in recent years, the company lost its ability to refinance vessel dropdowns in the equity markets.

Two years ago, parent GasLog Ltd. went private in a transaction engineered by the controlling Livanos family and supported by a division of BlackRock Inc. ( BLK ).

Since that time, Russia's assault on Ukraine has altered market conditions in favor of LNG carrier owners, with spot rates temporarily soaring to $450,000 in October.

While spot rates have come down considerably alongside natural gas prices in recent months, the long-term charter market continues to exhibit relative strength:

For this year, the partnership has already fixed 87% of available days with contracted revenues of almost $350 million and Adjusted EBITDA of approximately $260 million while keeping some spot exposure for the seasonally strong fourth quarter:

Since slashing the common unit distribution to a nominal amount in late 2020, the company has managed to reduce leverage with additional progress expected this year:

GasLog Partners has also been using excess cash to repurchase preferred stock in the open market, thus improving free cash flow:

With $87.4 million of the company's 8.20% Series B Preference Units becoming callable by mid-March and the distribution rate changing to LIBOR +5.839%, odds are in favor of the partnership exercising its right to redeem the units at par in the very near future.

Given the company's strong contracted cash flows, estimated net asset value ("NAV") around $15 and persistent market tailwinds, I wasn't exactly surprised to see the parent making a move for the partnership, particularly after peer Hoegh LNG recently succeeded in taking private Hoegh LNG Partners ( HMLPF ) at a rather moderate price.

That said, in contrast to Hoegh LNG, GasLog only controls 33.2% of the partnership's common units, which I would consider insufficient to achieve approval of the proposed transaction without the parent sweetening its offer in a meaningful way.

While the common unitholder base has likely shifted from income-oriented to more speculative investors in recent years, I fully expect the conflicts committee to negotiate substantially improved deal terms that should result in a buyout price of at least $10 per common unit, which would still represent a major bargain for the parent.

Bottom Line

Parent GasLog's move to take out the partnership on the cheap doesn't exactly come as a major surprise. However, I really do not expect the conflicts committee to endorse the proposed transaction without GasLog sweetening the offer substantially.

Even a buyout price of $10 or even $11 would still represent a major bargain for the parent, and with persistent market tailwinds from recent geopolitical events, there's a strong incentive for GasLog to get a deal done.

Despite the common units already trading above the aggregate $7.70 deal value, investors should consider joining this promising buyout speculation.

Personally, I have taken a position in GasLog's common units based on my firm expectation for a sweetened deal to be announced by the end of Q2 at the latest point.

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