Source: Enterprise Products Partners
Enterprise Products Partners L.P. (NYSE:EPD) and Enterprise GP Holdings L.P. (NYSE:EPE) today announced a definitive agreement that would result in the merger of EPE with a wholly owned subsidiary of EPD through a unit-for-unit exchange.
The transaction would result in EPE becoming a wholly owned subsidiary of EPD and the cancellation of the 2% economic general partner interest, the general partner incentive distribution rights in EPD and approximately 21.6 million EPD common units currently owned by EPE. Affiliates of privately-held Enterprise Products Company ("EPCO") will continue to own the general partner of the combined entity.
Under the terms of the definitive agreement, EPE unitholders would receive 1.5 EPD common units in exchange for each EPE limited partner unit they own at closing, representing a premium of approximately 16 percent based on the closing prices of each equity security on September 3, 2010. The merger would also result in a substantial increase in cash distributions for EPE unitholders. Based on the cash distributions paid in August 2010 by EPE and EPD, this would result in a 54 percent increase in cash distributions for the unitholders of EPE.
In connection with this transaction, certain affiliates of EPCO that own approximately 76 percent of the total number of outstanding EPE units have executed a support agreement pursuant to which they have agreed to vote their EPE units in favor of the merger. In addition, an affiliate of EPCO has agreed to waive the distributions that it would otherwise be entitled to receive on certain EPD common units for the first five years after the closing of the merger. Based on the quarterly distribution rate of $0.575 per unit that EPD paid in August 2010, the EPCO affiliate would waive over $275 million of aggregate cash distributions over this five-year period. Initially, the EPCO affiliate would be waiving distributions on approximately 30.6 million EPD common units during the first four quarters after the closing of the merger with the number of units subject to the distribution waiver declining over the following four years.
"We are pleased to announce our agreement to combine these two partnerships, which should reduce EPD's long-term cost of capital and simplify our organizational structure," said Michael A. Creel, president and chief executive officer of EPD's general partner. "Just like the landmark action taken in 2002 to eliminate our general partner's 50 percent incentive distribution rights, this transaction would not be possible without the continued support of EPCO and its affiliates and their agreement to waive a significant amount of distributions they would otherwise be entitled to receive during the first five years after the merger closes. With this support from EPCO in combination with our portfolio of growth opportunities and additional accretion provided by a lower cost of capital associated with the permanent elimination of the incentive distribution rights, we believe this merger will support the long-term growth of our partnership and cash distributions to our partners. In addition, we believe the merger will not impact our expected cash distribution growth rate nor practically affect our distribution coverage in the near term."
As a result of the distribution waiver from the affiliate of EPCO, EPD expects the transaction will only be nominally dilutive to EPD's distributable cash flow per common unit in the first year. Additionally, due to the distribution waiver, the transaction is expected to be break-even or accretive to distributable cash flow per common unit during the fourth and fifth years. Management expects to maintain EPD's strong distribution coverage for the foreseeable future and, consequently, currently intends to recommend to the Board of Directors of its general partner increases in the quarterly cash distribution paid to unitholders to $0.5825 per common unit, or $2.33 per unit on an annualized basis, with respect to the third quarter 2010 that is paid in November 2010 and $0.59 per common unit, or $2.36 per unit on an annualized basis, with respect to the fourth quarter 2010 that is paid in February 2011.
"We fully support the combination of these two successful partnerships," said Ralph S. Cunningham, president and chief executive officer of EPE's general partner. "We believe EPE unitholders will benefit from the immediate increase in the value of their post-merger partnership units and the distributions they will receive after the merger. We also believe EPE unitholders will benefit from their ownership of EPD units received in the exchange as this merger will enhance EPD's ability to pursue its growth objectives with the resulting lower cost of capital which should provide EPE unitholders with an attractive total return on their investment."
The completion of the merger is subject to the approval of at least a majority of the outstanding EPE limited partner units. The EPE units held by affiliates of EPCO that are subject to the support agreement are sufficient to satisfy this condition. The closing is also subject to customary regulatory approvals. Completion of the merger is expected to occur during the fourth quarter of 2010. The merger agreement may be terminated by either party if the merger has not closed on or prior to December 31, 2010 and for other limited circumstances set forth in the merger agreement. In addition, the support agreement executed by affiliates of EPCO will not be effective if the merger has not closed on or before December 31, 2010 and for other limited circumstances set forth in the support agreement.
Specifically, a subsidiary of EPCO has agreed to waive the distributions that it would otherwise be entitled to receive on approximately 30.6 million EPD common units during the first four quarters after the closing of the merger, 26.1 million EPD common units for four quarters thereafter, 23.7 million EPD common units for the four quarters thereafter, 22.6 million EPD common units for the next four quarters thereafter, and 17.7 million EPD common units for the next four quarters thereafter, after which there will be no EPD units as to which any distributions will be waived.
Following the closing of the merger, EPD expects affiliates of EPCO and management will own approximately 39 percent of EPD's outstanding common units.