OKE - Magellan Midstream unitholders brace for tax hit from Oneok takeover

2023-05-16 10:28:35 ET

Magellan Midstream Partners ( NYSE: MMP ) -1.5% in early trading Tuesday, giving back a sliver of its 13.5% gain that followed news of Oneok's ( OKE ) purchase of the partnership in a cash and stock deal initially valued at $67.50/unit.

The companies said the deal will be a "taxable event" for Magellan Midstream ( MMP ) unitholders, and New York tax expert Robert Willens told Barron's the tax bill could be significant .

The stock portion of the merger payment is taxable because while corporations can engage in tax-free reorganizations, partnerships such as Magellan Midstream ( MMP ) cannot.

"Not only is the deal fully taxable, it is a virtual certainty that most of the gain realized by the MMP partners will be ordinary income, rather than capital gain," Willens told Barron's, adding that Magellan Midstream ( MMP ) has so-called "hot" assets, which are taxed as ordinary income, not capital gains.

Magellan Midstream ( MMP ) unitholders, like those of other MLPs, receive distributions which are taxed lightly or not all initially, but the distributions reduce the holder's cost basis in the units, which defers taxes until the units are sold.

"When it comes time to sell the units, their diminished basis in the units makes for a very large gain and, to add insult to injury, such gain is largely ordinary in nature rather than capital," Willens told Barron's , noting "we always have this reckoning when an MLP 'roll up' is taking place."

More on Oneok:

• Financial and valuation comparison to sector peers
• Analysis: Oneok Acquiring Magellan Midstream Partners: Valuation Nice, Taxes Add Wrinkle
• Stock price return: Down 11% YTD, down 13% in the past 12 months

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