Energy Transfer Partners LP (NYSE: ETP) and Regency Energy Partners LP (NYSE: RGP) have agreed to merge in a unit-for-unit transaction, plus a one-time cash payment to Regency unit holders, that collectively implies a value for Regency of approximately $18.0 billion, including the assumption of net debt and other liabilities of $6.8 billion.
The agreement, approved by the boards of directors and conflicts committees of both ETP and Regency, gives Regency unitholders 0.4066 ETP common units and a cash payment of $0.32 for each common unit of Regency, implying an all-in price for Regency common units of $26.89 per unit based on ETP’s closing price on January 23, 2015. The deal represents a 13% premium for Regency common unitholders based on the closing price of Regency’s common units of $23.75 on January 23, 2015, and an approximately 15% premium to the volume weighted average price of Regency’s common units for the last 3 trading days ending January 23, 2015.
In addition, Energy Transfer Equity LP (NYSE: ETE), which owns the general partner and 100% of the incentive distribution rights (IDRs) of both Regency and ETP, has agreed to reduce the incentive distributions it receives from ETP by a total of $320 million over a five year period. The IDR subsidy will be $80 million in the first year post closing and $60 million per year for the following four years.
Finally, the rollup
“After literally years of waiting, we finally get the rollup of RGP into ETP, courtesy of energy sector volatility, the oil plunge, and the M&A weapon of choice, IDR givebacks,” said Baird Equity Research analyst Ethan Bellamy in a note to investors Monday. “We like the deal across the Energy Transfer family on increased simplicity. We don't expect much near-term fundamental impact. We expect the deal to get done with minimal if any sweetener required,” he continued.
The deal would create the second largest MLP, giving the combined company operations in almost all major producing areas in the US. The companies expect to capitalize on combined gathering and processing platforms in several producing regions, including the Permian Basin and Eagle Ford. Among the benefits is the likelihood of further liquids volume growth for Lone Star, which is ETP and Regency’s NGL joint venture, and also the expected increase in natural gas volumes into ETP’s intrastate pipeline system.
With the merger, ETP looks to increase its presence in the Marcellus and Utica shales, where Regency’s operations and growth projects complement ETP’s Rover interstate gas pipeline. Currently under construction, the pipeline is expected to create over 3 bcf/day of natural gas takeaway capacity from the plays. Activity by another ETP company, Sunoco Logistics Partners LP, should also complement activity in the area.
“In light of the current volatility in commodity prices and the changes in the capital markets, it became apparent over the last several months that Regency needed more scale and diversification, along with an investment grade balance sheet, to continue its growth,” said Mike Bradley, Regency’s CEO.
Latham & Watkins LLP acted as legal counsel to ETP. Baker Botts LLP acted as legal counsel to Regency. Barclays acted as financial advisor and Richards Layton & Finger acted as legal counsel to ETP’s conflicts committee. JP Morgan Securities LLC acted as financial advisor and Akin Gump Strauss Hauer & Feld LLP acted as legal counsel to Regency’s conflicts committee.
Subject to customary closing conditions, the transaction is expected to close in the second quarter of 2015.