The $18.8 billion deal by Oneok to merge with Magellan Midstream Partners has encountered some unexpected challenges since it was announced in May. While the deal appeared to be a sure thing initially, recent indications suggest it may have only a 50-50 chance of getting completed, given the current share prices and the arbitrage spread.
Management for Magellan Midstream Partners Objects
Management for Magellan Midstream Partners (MMP) has gone on the offensive since the recent release of the proxy statement for the merger, highlighting what it views as misconceptions about the deal regarding taxes. It is also placing emphasis on the benefits to its investor base.
“This transaction captures full value today for Magellan unitholders that would be difficult to realize otherwise,” said Aaron Milford, CEO of Magellan.
Decreased Value of the Deal
One major issue is that the value of the deal has decreased along with Oneok’s share price since the transaction was announced, making it potentially more difficult to gain approval from Magellan investors. As of Monday, Magellan units were up 1.0% to $60.09, above the pre-deal price of $55. However, the premium of the deal value relative to pre-deal Magellan unit price has dropped from 22% to approximately 16%. Oneok stock was up 1.5% to $58.42 on Monday and has fallen about 8% since the merger was announced.
Magellan Considers Other Offers
The deal proxy indicates that Magellan leaves the door open to potentially superior offers by negotiating a relatively modest breakup fee of $275 million in such a scenario. This move has raised concerns about whether or not Oneok can complete the merger as planned.
Despite these roadblocks, both companies continue to express optimism that the merger will ultimately be successful. However, the next few months are crucial in determining the outcome of this potential merger.
Berkshire Hathaway Potential Buyer for Magellan
Magellan, a leading transporter of crude-oil products, is set to be bought by Oneok for $25 a share in cash and 0.667 of Oneok stock for each Magellan unit. However, industry experts predict that Berkshire Hathaway, with its natural-gas pipelines and activity in the utility space, could make a more lucrative offer of $70 per share in cash for Magellan.
Although Warren Buffet has previously avoided corporate auctions, he may be inclined to make a take-it or leave-it offer. Nevertheless, Berkshire has yet to comment on whether it is interested in Magellan.
Magellan’s transportation network mainly operates in the center of America, and they are heavily involved in the transport of crude oil products like gasoline and diesel fuel. Oneok, on the other hand, deals with natural-gas liquids with minimal overlap with Magellan’s activities.
Insiders have noted that there isn’t much growth at Magellan, and the U.S. transition to electrified vehicles poses a risk. Nonetheless, the shift to EVs might be a gradual process that could take longer for large consumers of oil such as diesel-power vehicles and commercial airplanes. Furthermore, Magellan generates a fair amount of free cash flow.
Although the transaction requires half of Magellan’s approximately 202 million units outstanding to vote affirmatively, an estimated 50% to 60% of unit holders are individual investors likely to abstain from proxy and other votes, which could imperil the deal since a non-vote is equivalent to voting “no.”
The Tax Issue Surrounding Magellan’s Acquisition by Oneok
Barclays analyst Theresa Chen has indicated that the success of Oneok’s acquisition of Magellan Midstream Partners greatly relies on the vote by Magellan unit holders. However, this transaction is being criticized as a result of the substantial tax liability it presents to longtime holders.
Magellan, like other midstream companies, pays a high distribution of 7%, which mostly benefits from tax-deferrals. But with the deal structured as a corporation, Magellan holders are now liable to pay significant amounts in taxes with respect to their past tax-advantaged partnership-equivalent distributions. It has been estimated by Magellan that average long-term investors may have to pay approximately $24 a unit in taxes. This is sizable relative to the initial deal price of $67.50.
Magellan’s counterargument is that their returns, alongside other MLPs, are tax-deferred, not tax-free, and that it is generally expected that taxes will be paid at some point. The issue, therefore, is not if taxes are paid but when. On the other hand, investors argue that deferring taxes are preferable and many who plan to hold onto Magellan units until death could potentially avoid taxes entirely based on current estate-tax rules.
Another significant opponent of this acquisition is Energy Income Partners, which has a 3% stake in Magellan. The company has come out against this deal as a result of the tax issue and argues that many investors’ tax bills will outweigh the premium offered by Oneok and other potential benefits of this merger.
As such, the vote by Magellan unit holders remains uncertain, with a possibility of major opposition to this acquisition.
Magellan Retail Holders Express Displeasure Over ONEOK Deal
Several retail holders of Magellan have expressed their opposition to the proposed merger with ONEOK. One such holder is Georgia investor, Robert Carl, who wrote a letter to Magellan stating that the deal “makes no economic sense to us whatsoever.” He also cited an enormous tax bill that he and his family will incur on their investment. Carl argues that there are “few, if any, operational synergies” and notes that Magellan has a higher return on capital and credit rating.
Although both companies aim to achieve $200m or more in synergies annually, the deal faces unexpected obstacles that could derail those plans. However, in a recent statement, Magellan asserts that “our pending merger with ONEOK will create a stronger and more diversified midstream company and deliver significant value to Magellan unitholders.” Additionally, ONEOK lauds the merger as bringing “together two premier energy infrastructure businesses with strong returns on invested capital.”
The acquisition is expected to create a more resilient energy infrastructure company that will produce stable cash flows through diverse commodity cycles. ONEOK and Magellan plan to close the deal in the third quarter.
