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SemGroup Rejects Plains Merger Offer

SemGroup Corp. on Monday soundly rejected a $1.24 billion takeover bid by Plains All American Pipeline LP, calling the offer "opportunistic" and failing to reflect the company's "bright prospects."

The reply followed an announcement early in the day in which Plains attempted to make its case directly to shareholders to take over the midstream operator. Plains disclosed that on Oct. 6 it had offered to buy SemGroup for $24.00/share in cash, or about $1.24 billion.

Investors appear to think SemGroup is worth more. By midafternoon SemGroup was trading up almost 20% ($4.55/share) at $28.11. More than 2.6 million shares had traded hands near the close; average volume over the past three months has been around 335,000 a day.

Plains, which is based in Houston, has pursued Tulsa-based SemGroup since March 2010. The proposal early this month was made "orally and in a letter" delivered to SemGroup CEO Norman Szydlowski, Plains noted. The terms at the time represented a 16% premium to SemGroup's 10-day average closing price through Oct. 5, the day immediately prior to Plains' proposal, and a premium of around 20% over the 10-day average closing price prior to SemGroup's Aug. 31 announcement of an asset sale to NGL Energy Partners LP.

The company, which emerged from bankruptcy in late 2009, purchases, sells, processes, transports and stores crude oil, natural gas, natural gas liquids (NGL), asphalt and refined products. SemGroup recently had announced plans to increase the capacity of its gas processing facilities in northern Oklahoma, and the board said the increased processing capacity and other long-term strategies offered a compelling future for its shareholders.

Despite the decision by SemGroup's board to reject the offer, Plains said it would continue its pursuit and was making the offer public to inform stockholders of the proposal.

"We are disappointed by your board's decision to reject our proposal to acquire 100% of the issued and outstanding Class A and Class B common stock of SemGroup Corp. for $24.00 per share in cash," said Plains CEO Greg L. Armstrong in the letter to SemGroup. "We are also disappointed by your board's unwillingness to engage in constructive discussions about our proposal. Accordingly, we are compelled to take our proposal directly to your stockholders by making the terms of our proposal public."

SemGroup's SemGas division owns and operates more than 850 miles of gathering pipelines in Kansas, Oklahoma and Texas and three processing plants in Sherman, TX; Nash and Hopeton, OK; with a total of 78 MMcf/d of capacity. The south central Kansas pipeline is 380 miles long. The Eufaula pipeline system in eastern Oklahoma was originally built to serve the coalbed methane development area between the North Canadian and South Canadian Rivers. The pipeline consists of a 12 inch-diameter steel mainline and several miles of eight-inch, six-inch and four-inch laterals, for a total of 63 miles.

The SemStream division owns 12 NGL terminals and leases one. It operates in eight states and the network includes access to 4.4 million bbl of storage for NGL products and a rail fleet of more than 350 cars. SemStream Arizona has more than 12,000 residential customers, with a network of more than 200 miles of underground pipelines and storage services in central Arizona.

In August SemGroup agreed to sell SemStream for about $282 million in cash and stock to NGL Energy Partners LP. The transaction calls for SemGroup to take a 7.5% interest in the general partner of NGL Energy. SemGroup said at the time the transaction would enhance its investments in NGLs and provide new opportunities for growth. SemGroup also recently formed Rose Rock Midstream LP to monetize some assets from its crude division, "part of our larger strategic initiative to ensure that we have the right mix of assets and financial strength to participate in what we believe is an exciting and growing opportunity from the resurgent production of oil and natural gas in North America," Szydlowski said at the time.

Plains believes "that the attractive and certain value we are proposing to deliver to SemGroup's stockholders is greater than any value that might be created on a reasonable timetable from any of SemGroup's other strategic alternatives, including the value attributable to a successful completion of SemGroup's proposed initial public offering of its newly formed master limited partnership, Rose Rock Midstream LP, and its announced transaction with NGL Energy Partners, the expected value of which are already reflected in SemGroup's stock price," Armstrong said in his letter.

Plains transports and stores crude oil, refined products and liquefied petroleum gas, as well as other gas-related petroleum products. Through its general partner interest and majority equity ownership position in PAA Natural Gas Storage LP, the company also develops and operates gas storage facilities.

At the end of 2010 Plains owned 50 Bcf of gas storage capacity, 71 Bcf of projected average 2011 capacity and 11 Bcf of base gas in storage facilities. It also has a fractionation plant in Canada with a processing capacity of 4,400 b/d, and a fractionation and isomerization facility in California with aggregate processing capacity of 26,000 b/d.

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