MPLX LP (NYSE: MPLX) and MarkWest Energy Partners LP (NYSE: MWE) have signed a definitive merger agreement whereby MarkWest would become a wholly owned subsidiary of MPLX. The merger would create the fourth-largest master limited partnership (MLP) based on a market capitalization of $21 billion.
The deal would be a unit-for-unit transaction, generally expected to be tax-free, plus a one-time cash payment to MarkWest unitholders, that implies a total enterprise value for MarkWest of $20 billion, including the assumption of debt of $4.2 billion, as of the close of trading on July 10.
Under the terms of the merger agreement, which was unanimously approved by the boards of directors of the general partners of MPLX and MarkWest, the common unitholders of MarkWest would receive 1.09 MPLX common units and a one-time cash payment of $3.37 per MarkWest common unit, for total consideration of $78.64 per MarkWest common unit, based on fully diluted units currently outstanding and the closing price of MPLX's units on July 10. MPLX's sponsor, Marathon Petroleum Corp. (NYSE: MPC), would contribute $675 million of cash to MPLX to fund the one-time cash payment. In addition to a premium of 32% based on the July 10 closing price of $59.75, MarkWest unitholders would participate in the combined partnership’s projected distribution growth.
The proposed transaction combines the nation's second-largest processor of natural gas and largest processor and fractionator in the Marcellus and Utica shale plays with a growing crude oil and refined products logistics partnership sponsored by MPC.
MPLX Chairman and CEO Gary R. Heminger said that, as part of the combination, MPLX affirms its anticipated distribution growth of 29% this year and expects a 25% compound annual distribution growth rate for the combined entity through 2017, with the capacity to support a "peer-leading" distribution growth profile for an extended period of time thereafter.
The complementary aspects of MarkWest’s, MPLX’s, and MPC’s diverse asset base provide additional opportunities across multiple segments of the hydrocarbon value chain. The combined entity would further MarkWest’s midstream presence in the Marcellus and Utica shale plays by allowing it to pursue additional midstream projects. In addition, the combination provides significant vertical integration opportunities, as MPC is a large consumer of natural gas liquids.
Heminger commented that MarkWest’s $1.5 billion average annual capital investment program for the next five years, coupled with the inventory of MLP-qualifying earnings before interest, taxes, depreciation, and amortization (EBITDA) of $1.6 billion at MPC, provides a path to the growth in distributable cash flows of the combined partnership. Additionally, incremental capital investment opportunities available to the partnership, either directly or through MPC, could double the organic growth currently planned.
Heminger also noted that the combination of MarkWest and MPLX eliminates the need for the recently proposed MPLX acquisition of MPC’s marine transportation assets in 2015. As a result, that transaction has been indefinitely deferred.
Following the completion of the transaction, MarkWest would become a wholly owned subsidiary of MPLX. The MarkWest executive team would become executive officers of MPLX in roles similar to their current responsibilities at MarkWest, reporting to Heminger, and would remain in Denver, Colorado, where MPLX is committed to maintaining a presence. Frank Semple, MarkWest’s chairman, president, CEO, will become executive vice chairman of MPLX. In addition, two existing directors of MarkWest, including Semple, will be appointed to the board of directors of the general partner of MPLX, and Semple will be appointed to the board of directors of MPC.
MarkWest's Class A units, which are held by MarkWest subsidiaries, would receive newly created MPLX Class A units for each MarkWest Class A unit, and have similar rights to the existing MarkWest Class A units. MarkWest's Class B units, which are held by an affiliate of the Energy & Minerals Group, would receive newly created MPLX Class B units at a one-for-one exchange ratio and would have similar rights to the existing MarkWest Class B units.
Upon the conversion of the MPLX Class B units into MPLX common units in 2016 and 2017, the Class B unitholders would receive 1.09 MPLX common units for each MPLX Class B unit, as well as cash equal to the per unit cash consideration payable to MarkWest’s common unitholders, from the $675 million funded by MPC for the one-time cash payment. In connection with the merger, EMG, which will be the second-largest equity holder behind MPC on a pro forma basis, has entered into a voting agreement in favor of the transaction. Upon completion of the transaction, MPC would continue to own the general partner of MPLX and 19% of MPLX's common units.
The transaction between MPLX and MarkWest, which is subject to approval by MarkWest unitholders and to customary closing conditions and regulatory approvals, is expected to close in the fourth quarter of 2015.
UBS Investment Bank acted as financial advisor and Jones Day acted as legal advisor to MPLX in connection with the transaction. Jefferies LLC acted as financial advisor, and Cravath, Swaine & Moore LLP acted as legal advisor to MarkWest in connection with the transaction.
Commenting on the merger agreement, analysts from Global Hunter Securities said, “Based on our estimates, MPLX is paying a 21x 2015 EBITDA multiple and a 17x 2016 EBITDA multiple for the transaction. Additionally, MWE unitholders get to participate in 29% distribution growth this year and 25% distribution growth through 2017. With some headwinds from weak NGL pricing in the Northeast and also potential competition from a formidable competitor if the Williams-Energy Transfer merger goes through, MWE management has taken a proactive step to ward off competition. MPLX management reiterated its distribution growth guidance of 29% growth in 2015 and 25% CAGR through 2017.”
MPLX is a fee-based, growth-oriented MLP formed in 2012 by Marathon Petroleum Corp. to own, operate, develop, and acquire pipelines and other midstream assets related to the transportation and storage of crude oil, refined products, and other hydrocarbon-based products. Its assets consist of a 99.5% equity interest in a network of common carrier crude oil and products pipeline assets located in the Midwest and Gulf Coast regions of the US, and a 100% interest in a butane storage cavern located in West Virginia with 1 million barrels of natural gas liquids storage capacity.
MarkWest Energy Partners is an MLP that owns and operates midstream service businesses, with a presence in many US unconventional resource plays.