Investors don't think much of Sunoco Logistics Partners LP (NYSE:SXL)'s $20 billion purchase of affiliate Energy Transfer Partners LP (NYSE:ETP), and with good reason.
The deal, which consists of all stock, looks cheap, valuing ETP at $39.29 per unit, slightly lower than its $39.37 closing price this past Friday (the entities say the price represents a 10% premium over the target's average closing price over the last 30 days).
Sunil Sibal, who follows the energy infrastructure sector at Seaport Global Securities, said Sunoco Logistics also pays less in dividends -- $2 per unit per year vs. $4.22 per unit at ETP. He expects the deal to lead to a distribution reduction of about $1.22 per Energy Transfer Partners unit or $650 million. He is also concerned about its debt load of $30.4 billion.
Energy Transfer Partners' stock was down 8% in midday trading Monday to $36.22 per unit while Sunoco Logistics' stock was off 7.5% to $24.24.
The deal may turn out well in the long run. Management -- which is led by billionaire Kelcy Warren -- expects the combination will result in $200 million in annual cost synergies by 2019. So along with the $650 million payout cut, the entity will end up saving $850 million overall, Sibal figures, which could go toward paying down the debt, fund new projects and maybe even boost the dividend.
The transaction shouldn't have come as a surprise, as management previously said it was actively considering a "simplifying" transaction, Sibal notes. He thinks the deal will lower the cost of capital for the Energy Transfer complex, which includes Energy Transfer Equity LP (NYSE:ETE) and Sunoco LP (NYSE:SUN), positioning it well for acquisitions as the industry continues to consolidate.
Energy Transfer Equity is already benefiting, with its units trading up almost 4% to $17.96 per unit on the news. However, Sunoco LP's units fell by 4% to $22.83 per unit.
Warren could use some good news. Energy Transfer Equity's planned $30 billion acquisition of Williams Cos. Inc. (NYSE:WMB) fell apart last summer due to tax issues. More recently, approval for its $3.7 billion Dakota Access Pipeline project has been hung up by federal regulators after protests from environmentalists.
Sibal's biggest questions about the merger revolve around how the debt and the incentive distribution rights will be treated after the deal closes. Answers around those issues may be key in getting unitholders to come around to the eventual value of the deal.
