Description
The energy space stands out among the hardest hit among the many sectors that have been clobbered in the recent market rout. MLPs stand out as some of the worst performers within the energy sector. So why buy an energy MLP?
Tallgrass Energy (TGE) is a merger arbitrage opportunity with a really short fuse.
The shareholder vote is scheduled for tomorrow.
The transaction has been substantially de-risked.
TGE’s current price of $19.60 offers a 15% return to the offer price of $22.45.
The transaction is scheduled to close in the first half of 2020, and could potentially close in a few days.
The one question remaining is whether Blackstone will close.
Background
On December 16, Blackstone agreed to purchase the 56% of TGE units that it didn’t already control. (Blackstone also owns 100% of the TGE GP.) TGE is a midstream energy company with diverse exposure to U.S. oil and gas production. It operates FERC regulated oil and gas interstate pipelines and owns a collection of gathering and processing assets. 2019 Adjusted EBITDA was approximately $1 billion.
Financing
Aggregate consideration of $3.5 billion is being provided by a $2.9 billion equity contribution from Blackstone and $610 million of debt ($375 million from a new acquisition facility, and $235 million from TGE’s existing line). Blackstone has arranged $575 million of commitments to cover the expected $375 million deal financing. TGE had $794 million available on its $2.25 billion Revolver at the end of 2019, and raised an additional $430 million in 7-year debt in February.
Will Blackstone Close?
Strategic deals generally have a lower risk than private equity deals. There were a number of PE deals that fell apart in the last financial crisis.
In this case, I believe that Blackstone has a strong incentive to close. Blackstone already controls 44% of TGE. A broken deal would hurt Blackstone as well as the public unit holders.
The Material Adverse Effect definition in the Merger Agreement suggests that it would be difficult for Blackstone to walk away. The following are specifically excluded from the definition of a Partnership Material Effect:
“(a) changes in general local, domestic, foreign or international economic conditions; (b) changes affecting generally the industries or markets in which such Person operates (including changes in commodity prices or interest rates); (c) acts of war, sabotage or terrorism, military actions or the escalation thereof, weather conditions or other force majeure events or acts of God, including any material worsening of any of the foregoing conditions threatened or existing as of the date of this Agreement… “
While it is certainly possible that Blackstone could try to break the deal, Bloomberg has reported that Blackstone reiterated its desire to complete the deal.
Risks
TGE is trading above the $18 price it traded at before the deal was announced in December. Other mid-stream operators are down about 25% since December. If the deal were to break, TGE would likely trade down to the low teens.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Shareholder meeting 4/16.