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Marathon Again Raises MarkWest Offer; Concerns Over Merger Grow

Marathon Petroleum Corp. (MPC) has thrown another $205 million at MarkWest Energy Partners LP unitholders to sweeten the bid for its master limited partnership, MPLX LP, to acquire the nation's second largest natural gas processor, increasing the cash consideration to $1.28 billion.

In what it called on Tuesday its "best and final offer," the raise was MPC's second in the last week, following a Nov. 10 announcement in which the company said it would increase its cash consideration for the merger by $400 million (see Shale DailyNov. 11). When the deal was proposed in July, MPC offered a one-time cash payment of $675 million (seeShale DailyJuly 13). That grew to $1.075 billion last week before Tuesday's offer.

The proposed merger is mostly a unit-for-unit transaction. Under the revised terms, MarkWest unitholders would receive the $1.28 billion in cash and 1.09 MPLX common units per MarkWest common unit, for an all-in consideration of $51.74 per MarkWest unit, based on the company's Nov. 16 closing price.

Initially, however, the deal valued MarkWest at $20 billion, including $4.2 billion in debt that MLPX would assume, offering MarkWest unitholders $78.64/unit. But as investors have grown wary of MLPs, selling off their stakes with oil's staggering fall and low natural gas prices amid concerns about their ability to grow, the stock prices of both companies have fallen, too, shrinking the value of the current deal to about $10 billion.

The merger would combine the nation's second-largest natural gas processor and fourth-largest fractionator in MarkWest and its fourth-largest crude oil refiner in MPC. Executives at both companies have touted the deal as a compelling story of opportunity that could double MarkWest's already stunning growth profile over the next five years. Financial analysts have also noted that MarkWest is one of nation's largest sub-investment grade MLPs. They've argued that a merger with MPC would be a significant event that allows the company more flexibility with a lower cost of capital.

But concerns have emerged on both sides of the deal as a potential closing date draws near. During a third quarter earnings conference call -- prior to Tuesday's announcement -- analysts pressed MPC CEO Gary Heminger on the acquisition price given the decline in both MPLX and MarkWest unit prices. Some MarkWest unitholders have argued that MarkWest should remain a standalone company given its distributions and high growth profile.

MPC said Tuesday that three of MarkWest's largest unitholders -- Kayne Anderson Capital Advisors LP, Tortoise Capital Advisors LLC and The Energy and Minerals Group -- have entered into voting agreements in favor of the transaction. Those firms hold 15% of MarkWest's outstanding units entitled to vote for the deal, which is subject to MarkWest unitholder approval.

The merger has also been recommended by each of the boards of directors of MPC, MPLX and MarkWest, along with each of the executive management teams. But in a letter to MarkWest, posted on a website he created to argue against the merger, the company's co-founder and former CEO, John Fox, said MarkWest's distributions -- or its tax-advantaged payments from available cash flow to unitholders -- would see "draconian" cuts.

"The cash portion of the merger consideration is not adequate compensation to the MarkWest unitholders for this huge reduction in distributions, especially when viewed in connection with the huge drop in market price for both MarkWest and MPLX units," Fox wrote to MarkWest’s general partner in a letter dated Nov. 4.

Last week, after MPC increased its cash consideration, Fox said it still was not enough, maintained that the company should remain standalone and said publicly that he's been in contact with at least 15 of MarkWest's largest shareholders who believe the deal is not favorable.

During MPC's third quarter earnings call, Hemminger said a vote against the merger is in the company's "base case," but he said he's confident in the value it would create for both sides if approved. A special unitholder meeting has been scheduled for Dec. 1 to vote on the matter. MPC said the deal is expected to close next month.

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