Natural gas midstream company Oneok Inc. on Monday announced that it has agreed to purchase Magellan Midstream Partners LP for $18.8 billion, giving the Tulsa-based firm entry into the transportation of crude oil and refined products.
Under the deal, Oneok would acquire all outstanding units of Magellan in a cash-and-stock transaction, resulting in a combined company with a total enterprise value of $60.0 billion. Magellan shareholders are to receive $25.00 in cash and 0.6670 shares of Oneok common stock for each outstanding Magellan common unit. This represents a current implied value to each Magellan unitholder of $67.50/unit, for a 22% premium based on May 12 closing prices.
“Oneok has a long history and track record of being at the forefront of transformational transactions,” said CEO Pierce H. Norton II. “The combination of Oneok and Magellan will create a diversified North American midstream infrastructure company with predominantly fee-based earnings, a strong balance sheet and significant financial flexibility focused on delivering essential energy products and services to our customers and continued strong returns to investors.”
Oneok primarily owns natural gas liquids (NGL) systems that carry supply from the Rockies, Midcontinent and Permian Basin to downstream market centers. It also has an extensive network of natural gas gathering, processing, storage and pipelines.
Magellan’s primarily demand-driven businesses are expected to generate significant free cash flow (FCF) because of low capital expenditure requirements, according to Oneok. “This acquisition creates a more resilient energy infrastructure company that is expected to produce stable cash flows through diverse commodity cycles.”
The combined company would own more than 25,000 miles of liquids-oriented pipelines. Oneok anticipates the combined liquids-focused portfolio to present the potential for enhanced customer product offerings and increased international export opportunities.
“We believe these activities could potentially result in total annual transaction synergies exceeding $400 million within two to four years,” Oneok said.
In addition, Oneok expects to benefit from the step-up in Magellan’s tax basis from the transaction, deferring the expected impact of the new corporate alternative minimum tax from 2024 to 2027.
The deal is expected to close in the third quarter of 2023 and has been unanimously approved by the board of directors of both companies. Oneok has secured $5.25 billion in fully committed bridge financing for the proposed cash consideration.
The transaction is subject to customary closing conditions, including the approvals of both Oneok shareholders and Magellan unitholders.
Following the close of the transaction, Norton would continue to serve as CEO of the combined company. Oneok intends to seek and nominate one or two directors serving on the board of Magellan’s general partner.
Goldman Sachs & Co. LLC is serving as lead financial advisor to Oneok. Kirkland & Ellis LLP is serving as Oneok’s legal advisor.
Morgan Stanley & Co. LLC is serving as financial advisor to Magellan. Latham & Watkins LLP and Richards, Layton & Finger, PA are acting as Magellan’s legal advisors.
Exports On The Horizon?
Financial consultant group VettaFi said Oneok and Magellan have some geographical overlap among their assets, but their operations are very different. By combining unique asset bases, the transaction would result in a larger, more diversified corporation. Magellan’s asset base and expertise may also accommodate new export opportunities for Oneok, according to VettaFi.
At the same time, Magellan has been known for its capital discipline, steady distribution growth and generous buybacks in recent years – positive attributes that would likely be missed by its investors, according to VettFi. Under the terms of the deal, Magellan unitholders would see a lower dividend upon closing, “but given enhanced growth prospects of the combined company, there is likely more dividend upside in the long run.”
As for the tax implications of the deal, VettaFi said tax benefits could potentially increase if new projects are completed or additional acquisitions are made. “It is difficult to speculate whether this transaction may serve as a catalyst for more dealmaking in the space or the extent to which potential tax benefits could motivate additional consolidation.”
Oneok has garnered increased attention in recent weeks. The midstreamer earlier this month indicated it continues to target a final investment decision (FID) by mid-year on a proposed natural gas pipeline that would carry Permian Basin supply to the Mexico border. The 2.8 Bcf/d Saguaro Connector, if sanctioned, would serve the Saguaro LNG export terminal proposed by Mexico Pacific Ltd. LLC, which also has yet to reach FID.
