Liquefied natural gas (LNG) producer Cheniere Energy Inc. (NYSEAMERICAN: LNG) has agreed to acquire all publicly traded shares that it does not already own in Cheniere Energy Partners LP Holdings LLC (NYSEAMERICAN: CQH) for $30.93 per share in Cheniere Energy stock. The transaction is expected to be tax-free to Cheniere Holdings shareholders. The proposed acquisition was first announced on May 17.
As of the end of the first quarter of 2018, 17.3% of Cheniere Holdings’ common shares were publicly held. Cheniere Energy had only non-economic voting control of the firm. Cheniere Holdings’ sole asset was a 48.6% limited-partner interest in Cheniere Energy Partners L.P. (NYSE: CQP), Cheniere Energy’s publicly traded master limited partnership (MLP).
While the premium Cheniere is paying is small (2.1%), when the offer was first made in May Cheniere Holdings’ share price was $28.24 per share and the share-for-share exchange ratio was the same, 0.45 Cheniere Energy shares for each share of Cheniere Holdings. At that ratio, the premium pencils out to 9.5%.
Cheniere is just the latest energy company to begin adjusting its corporate structure to limit the impact of a regulatory ruling that eliminates a principal advantage of owning a master limited partnership (MLP).
The Federal Energy Regulatory Commission (FERC) in March revised its prior policies and no longer allows MLPs like Cheniere Partners to recover an income tax allowance in their cost of service. Under the previous policy, MLPs were allowed to receive both an income tax allowance and a return on equity based on discounted cash flow, a policy the federal Circuit Court in Washington, D.C., ruled gave MLPs double recovery of income tax costs and that the FERC was forced to roll back.
What was once a feature of MLPs is now a bug, and the convoluted corporate structures that characterize MLPs may no longer benefit the general partners or the limited partners to the degree that they once did. Weighed against a lower cost of capital for corporations that issue common stock, MLPs lose again.
With all the shares of Cheniere Holdings in its pocket, Cheniere Energy can begin to reel in Cheniere Partners, of which it holds more than half of publicly traded common units and a 100% interest in the general partner of Cheniere Partners. A subsidiary of Blackstone Group L.P. (NYSE: BX) owns 40.3% of Cheniere Partners’ common units.
Shares of Cheniere Holdings traded up about 1.1% early Tuesday to $30.61, in a 52-week range of $24.03 to $30.74.
Cheniere Energy shares traded down about 2.2%, at $63.73 in a 52-week range of $40.36 to $68.04. The 12-month consensus price target is $70.13.