Big Deal in the Propane Business (SPH, NRGY, APU, FGP)

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There could be a new big dog in the propane distribution business soon, following this morning’s announcement by Suburban Propane Partners LP (NYSE: SPH) that it has reached an agreement to acquire the propane businesses of Inergy L.P. (NYSE: NRGY) in a stock and cash deal worth approximately $1.8 billion. The current market cap leader in the business is AmeriGas Partners L.P. (NYSE: APU) at $3.4 billion, followed by Inergy at $2.5 billion, Suburban at about $1.55 billion, and Ferrellgas Partners LP (NYSE: FGP) at $1.22 billion. Suburban and Inergy will switch places and Suburban could even threaten AmeriGas for the top spot.

Suburban will pay for the deal with $1 billion in new senior notes, $200 million in cash, and $600 million in new common units of Suburban to be distributed primarily to Inergy unitholders. Inergy will retain its midstream operations which include storage and transportation of natural gas and natural gas liquids (NGL) for third parties, NGL fractionation and distribution, processing of natural gas, and the production and sale of salt.

In connection with the acquisition, Suburban will begin an exchange offer for $1.2 billion in Inergy’s outstanding debt in exchange for $100 billion in new Suburban debt and $200 million in cash. The offer is expected to commence about May 3rd.

Suburban will also hold an underwritten offer $250 million in new common units to pay the cash portion of the acquisition price and to pay the costs and fees related to the acquisition. The deal is expected to close in the second half of 2012.

Essentially Suburban is doing the entire deal without spending a real dime. To take some of the sting out of that for current unitholders, Suburban raised its annual distribution from $3.41/common unit to $3.50/common unit, but it won’t be payable until the payment due for the company’s first fiscal quarter of 2013, which ends on December 29, 2012.

Inergy’s common units are up 16.7% at $19.66 in a 52-week range of $15.06-$41.22. Suburban’s common units are also up, but by a more modest 0.3% at $43.73 in a 52-week range of $40.25-$57.89.

Paul Ausick