MLP merger and acquisition activity can take a number of different forms to unlock value for sponsors and unitholders.
Background -
In the first half of 2014, master limited partnership (MLP) mergers and acquisitions (M&A) transactions represented approximately 25 percent of all US oil and gas industry M&A activity. MLP transactions in the midstream and upstream subsectors have dominated the MLP M&A market. By value, the vast majority of these deals (88 percent) consisted of public companies acquiring private targets. Following the trend from last year, entity-level (as opposed to asset-level) M&A transactions have been the primary form of MLP M&A activity so far this year. From this year’s transactions, we have identified four trends worth exploring.
1. The Kinder Morgan Consolidation -
While later-stage MLPs can present some difficulties for public unitholders — as incentive distribution rights (IDRs) can drain off significant cash flow and constrain growth — the Kinder Morgan consolidation provides an interesting solution: the C-Corp general partner combines with its MLP subsidiaries. Although Kinder Morgan’s particular situation may be unique, the transaction creates one possible “blueprint” for a successful exit strategy for mature MLPs that are paying distributions well into the “high splits.” This transaction also could set the stage for Kinder Morgan to begin aggressively acquiring other MLPs.
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