More Oil & Gas Consolidation Seen in MLP Sector

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Another merger is being seen in the world of master limited partnerships (MLPs). AmeriGas Partners L.P. (NYSE: APU) is being acquired by UGI Corp. (NYSE: UGI) in a merger that should be viewed as a $2.44 billion consolidation rather than as any hostile merger.

UGI is acquiring the nation’s largest retail propane marketer in a deal whereby it will purchase the 69.2 million publicly held common units it does not already own. UGI currently holds a stake of roughly 26% ownership interest in AmeriGas, and AmeriGas Propane, Inc., a wholly owned UGI subsidiary, has served as the sole general partner of AmeriGas since 1995.

The terms of the purchase call for AmeriGas unitholders to receive 0.50 shares of UGI common stock plus an additional $7.63 in cash consideration for each common unit of AmeriGas. The deal was represented to be a 21.9% premium to the 30-day volume weighted average price of AmeriGas units, and it was a 13.5% premium to the $31.13 closing price of April 1, 2019.

Consolidation of the MLP structures is not a new issue, and this is far from the first such consolidation.  Upon the transaction’s close, AmeriGas will no longer be classified as an MLP and it will become a wholly owned subsidiary of UGI.

The management of UGI laid out its expectations of what will happen for its own shareholders. The merger is said to increase UGI’s cash flow per share by over 15% for fiscal 2020 on a fully consolidated basis and to provide over $200 million in additional annual cash flow.

UGI also updated its 2019 guidance, excluding the impact of its merger, for adjusted earnings per share to be in a range of $2.40 to $2.60, versus a prior range of $2.75 to $2.95, based on significantly warmer-than-normal winter weather in its European markets and on the impact of limited weather volatility during the fiscal 2019 heating season on its capacity management business. AmeriGas said that it now currently expects to be at the low end of its fiscal 2019 adjusted EBITDA guidance range of $610 million to $650 million, largely due to unfavorable weather patterns in the Southern U.S. during January and February.

The merger is also said to support the increase of UGI’s annualized dividend to its shareholders, by $0.16 per share for the July dividend and another $0.10 per share following the transaction’s close, while also being accretive to its adjusted earnings beginning in fiscal 2020. UGI plans to increase its second fiscal quarter dividend by 15% (to $0.30 from $0.26) and an additional 10% (to $0.325 from $0.30) following the closing of the transaction.

The research team at Janney sees better value ahead, noting that this was the logical outcome of a strategic review. Janney maintained its Buy rating on UGI along with a $65 fair value. While the firm’s Michael Gaugler lowered 2019 estimates, he said of the deal’s outcome:

The APU transaction is expected to be accretive to 2020 adjusted EPS for UGI, but we’ve made no adjustments at this time, preferring to take the conservative approach and wait for the transaction to close. We see substantial benefits for UGI and its shareholders with the APU transaction, particularly in terms of future cash flow and significant increases in dividends in 2019. All-in, we recommend investors ignore the near-term volatility today’s dual announcements have created and focus on the longer term outlook, which we consider exceptionally strong from a growth & income perspective.

Units of AmeriGas Partners were last seen trading up 10.4% at $34.36 on Tuesday afternoon, in a 52-week range of $22.75 to $43.79 and with a consensus analyst target of $34.20.

UGI shares were trading down by 7.8% at $51.06, in a 52-week range of $43.80 to $59.31 and with a consensus target price of $58.40.


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