An independent proxy advisory firm has issued a report recommending that MarkWest Energy Partners LP's unitholders approve a merger with Marathon Petroleum Corp.'s (MPC) master limited partnership (MLP), MPLX LP, saying current market factors make the deal an attractive one.
Institutional Shareholder Services (ISS) released its report Tuesday with the recommendation as the expected closing date draws near in December, when MarkWest unitholders -- who must vote on it -- are expected to gather for a special meeting.
"Given the premium to the unaffected price at announcement, the subsequent cash increases in the merger consideration and the strategic advantages of the combination (including both the access to relatively more certain capital sources at a lower cost of capital and the ability to de-risk certain growth opportunities with Marathon as its parent), a vote FOR the merger is warranted," ISS wrote in its report.
The deal was announced in July (see Shale Daily, July 13). Since then, Marathon has increased its cash consideration for the acquisition from $675 million to $1.28 billion, raising the offer by $400 million last week and by $205 million earlier this week (see Shale Daily, Nov. 11). The merger has already been recommended by each of the boards of directors of MPC, MPLX and MarkWest, along with each of the executive management teams.
It 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. But as the sharp decline in oil and gas prices has bit into the value of the MLP sector this year, concerns have been raised about the merger. At the time it was announced, the deal valued MarkWest at about $20 billion, minus debt MPC would absorb, and offered MarkWest unitholders $78.64/unit. Under the current agreement, they would get $51.74/unit as market forces have eroded the MLP sector's value.
MarkWest co-founder and former CEO John Fox has warned against the merger, saying the cash consideration would not be enough to offset the projected cuts in MarkWest's distributions, or payments to unitholders (see Shale Daily, Nov. 17). The companies have publicly disclosed that following the merger, MarkWest's annual distributions would likely be cut by 46% and not return to pre-merger levels for three to five years after the merger.
ISS acknowledged that the equity component of the proposed merger has declined since it was announced but said that fact "appears to be driven by macro issues with the sector at large." The firm said that despite increases in MPC's cash consideration, the overall offer has slid nearly 14% compared to MarkWest's value prior to the merger announcement.
But the firm concluded that "without the transaction, it seems doubtful the current market price would be anywhere near the unaffected price," or the value of MarkWest prior to the merger announcement. MarkWest began mailing supplemental proxy materials on Nov. 17 and urged all unitholders on Wednesday to vote on the deal regardless of the number of units they hold because, the company said, abstaining would amount to a vote against the merger.