2023-05-18 11:48:08 ET
Summary
- Major transaction news hit the midstream industry on May 14, 2023.
- MMP is set to be acquired by ONEOK in a stock-and-cash deal worth $19B.
- The acquisition is set to result in the creation of one of the largest midstream-focused energy companies in the United States.
- FCF accretion, synergies and increased diversification are direct benefits of this transaction for ONEOK.
ONEOK (OKE) announced on May 14, 2023 that it is acquiring Magellan Midstream Partners (MMP) in an $18.8B deal, including the assumption of $5.0B in net debt. The acquisition will result in the creation of one of the largest energy infrastructure companies in the United States and the acquisition, according to projections, is expected to result in annual average free cash flow accretion of 20% or more between FY 2024 and FY 2027. The transaction is also expected to yield large cost and tax synergies for ONEOK and creates a much more diversified energy company. I believe the deal make strategic sense for both Magellan Midstream Partners as well as ONEOK!
ONEOK acquires Magellan Midstream Partners
Major acquisition news in the pipeline industry hit shareholders of ONEOK and Magellan Midstream Partners on Sunday as the former made an $18.8B stock-and-cash acquisition offer for the latter that is set to result in the creation of one of the largest midstream companies in the sector with an estimated enterprise value of $60B.
ONEOK announced on May 14, 2023 that it executed a definitive merger agreement with Magellan Midstream Partners that will see the company pay $25 in cash and give unitholders of Magellan 0.6670 shares of ONOEK for each outstanding unit of MMP. Approximately 37% of the transaction value is expected to go to Magellan investors in cash while ONEOK investors will own approximately 77% of the merged midstream company after the transaction closes (expected in the third-quarter) ONEOK's acquisition offer implied a 22% premium to the closing price of Magellan Midstream Partners' units before the deal was announced to investors.
Deal benefits
The deal is expected to be highly accretive to ONEOK and is therefore a great deal for the current owners of the midstream company: according to ONEOK's transaction presentation , the company believes that it can capture 3-7% EPS accretion between FY 2025 and FY 2027, and 20% in free cash flow accretion between FY 2024 and FY 2027. ONEOK also reaffirmed its commitment to pay out 85% of its earnings in the coming years which could result in accelerating dividend growth for ONEOK investors between FY 2024 and FY 2027.
For ONOEK, the deal makes a lot of strategic sense, besides the accretion effects that are expected from the transaction. Synergies are expected to amount to $200M in the base-case scenario while longer term synergies could exceed $400M annually.
Additionally, the transaction makes strategic sense because it combines Magellan's fee-based liquids business with ONEOK's fee-based natural gas business. The merged company is therefore not only going to be much bigger, but also much more diversified regarding its product mix.
The immediate consequence for ONEOK is that it will be much less reliant on its NGL business which currently accounts for 60% of the company's operating income. After the transaction, NGL will represent less than 50% of pro-forma operating income while refined products are going to be second-largest segment going forward with an operating income contribution of approximately 21%. With better diversification and new liquids products complementing the portfolio, ONEOK will be less dependent on its natural gas business and create a new income stream that is also heavily fee-based. Midstream firms benefit from fee-based arrangements as they are much less exposed to the unpredictability of energy market prices.
ONEOK's valuation remains attractive post-merger announcement
ONEOK's valuation based off of EBITDA was more or less in line with the valuation of other midstream companies, before the transaction announcement. ONEOK's shares are currently valued at 8.2X Enterprise-Value-to-EBITDA (on a standalone basis) which is slightly lower than Kinder Morgan's EV-to-EBITDA ratio. Given the accretion benefits discussion above, as well as the potential to increase the company's diversification going forward, I believe ONEOK's valuation is attractive on the post-merger announcement drop. I also had a favorable opinion on Magellan Midstream Partners before the merger announcement due to the company achieving 85% of its operating income from fee-based arrangements with its customers.
Risks with ONEOK/Magellan transaction
One key risk with the transaction is that accretion benefits may not be realized as stated which could result in an underwhelming post-merger performance of ONEOK's shares. The general risk that I see in the midstream business relates to the U.S. government is not very fond of fossil fuel companies. Regulatory restrictions on pipeline expansion projects and a preference for the renewable energy sector could limit ONEOK's post-merger growth potential in the midstream business which could then translate to weaker cash flow and EBITDA growth.
Final thoughts
The merger between ONEOK and Magellan creates one of the largest premier energy infrastructure companies in the United States with an enterprise value of approximately $60B. There are huge synergy and accretion effects regarding earnings and free cash flow that could result in accelerating dividend growth for ONEOK investors. I believe the largest benefit of the transaction is the increased diversification profile of the merged business which will include ONEOK's natural gas assets as well as Magellan's liquids assets. From a strategic point of view, I believe the transaction makes a lot of sense and it could provoke other midstream companies to grow their businesses through M&A as well!
For further details see:
ONEOK And Magellan: A Great Deal For Everyone