Who Wins From Sunoco Logistics, Energy Transfer Partners Deal?

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Sunoco Logistics LP (NYSE: SXL) and Energy Transfer Partners LP (NYSE: ETP) announced Monday morning that the two master limited partnerships (MLPs) have entered a merger agreement in an all-stock deal valued at $19.93 billion. Common unitholders in ETP will receive 1.5 common units of SXL for each unit of ETP they own.

ETP owns 75% of the controversial Dakota Access Pipeline and the company failed to complete a $38 billion acquisition of Williams Companies Inc. (NYSE: WMB) earlier this year.

What makes the new deal unusual is the role played by Energy Transfer Equity LP (NYSE: ETE), the MLP that owns the general partner and 100% of the incentive distribution rights (IDRs) of ETP and Sunoco LP (NYSE: SUN). ETE also owns about 2.6 million ETP common units and about 81 million ETP class H units, “which track 90% of the underlying economics of the general partnership interest and IDRs of [SXL].” ETP owns about 21% of SXL’s general partner according to a report from Reuters.

The relationship between SXL, ETP, and ETE is described in the press release announcing the deal:

As SXL will be the acquiring entity, the existing incentive distribution rights provisions in the SXL partnership agreement will continue to be in effect, and [ETE] will own the incentive distribution rights of SXL following the closing of the transaction. As part of this transaction, ETE has agreed to continue to provide all the incentive distribution right subsidies that are currently in effect with respect to both partnerships.

Exactly how that is going to work may be cleared up during a conference scheduled for Monday afternoon at 4:00 p.m. ET. And while SXL is named as the acquirer in this transaction, the press release does not say what the combined company will be named.

The companies expect the deal to close in the first quarter of 2017 pending approval by ETP unitholders and other customary closing conditions. When the transaction closes, the CEO of the combined company will be Kelcy Warren, currently chairman and CEO of ETP, along with three other top executive of ETP. Mike Hennigan, who is currently president and CEO of SXL and other members of the SXL management team are expected to continue in “leading management roes of the combined company with the SXL business headquartered in Philadelphia.”

Based on the press release and market reaction, the winner in this deal is ETE which gains the remaining IDRs to SXL once the deal closes. That appears to be an increase of about 10% compared with the current arrangement.

Common units of ETP traded down nearly 10% Monday morning at $35.49 in a 52-week range of $18.62 to $43.50.

Common units of SXL traded down by the same amount at $23.58 in a 52-week range of $15.43 to $31.49.

ETE common units traded up more than 2% after spiking to a gain of about 10%. Units traded at around $17.56 recently in a 52-week range of $4.00 to $19.99 and the high was posted early this morning.