Oneok’s contentious deal to buy
Magellan
Midstream Partners for around $19 billion looks like it will get completed after an aggressive campaign by Magellan management to win over its investor base and recent recommendations in favor of the deal from two influential proxy advisory firms.
Magellan Midstream Partners
(Ticker MMP) said last week that Glass Lewis and Institutional Shareholder Services (ISS) had recommended that Magellan’s unitholders approve the deal which was announced in mid May.
Since then, Magellan units have gotten a lift, although they were little changed at $66.45 Monday. near a recent 52-week high of $67 (OKE) was down 0.4% to $64.53 Monday.
The arbitrage spread between Magellan’s unit price and the deal value has narrowed lately and stands at about $1.50 per Magellan unit.
This indicates that arbitrageurs are putting odds of 80% or more that the deal will get done, assuming that Magellan would trade down to about $60 if the deal fails to get sufficient unitholder support. Magellan holders are due to receive 0.667 shares of Oneok and $25 a share in cash for each Magellan unit.
When the deal was announced, the value of the consideration was $67.50, compared with Magellan’s pre-deal price of about $55. The arbitrage spread had been as wide as $5 per unit in June when Wall Street was more skeptical about the deal’s prospects.
The unitholder vote is scheduled for Sept. 21 and the deal could close soon after that if the transaction is okayed by both sets of shareholders.
Oneok shareholders are seen as likely to support the deal which would unite two of the larger energy pipeline operators in the country. Oneok mainly transports natural-gas liquids while Magellan is a leading carrier of gasoline, jet fuel, diesel and other crude-oil products mostly in the center of the country. The key issue from the start would be whether Magellan holders okay the transaction.
After the deal was announced in May, many individual holders of Magellan were upset about the prospect of a large tax bill for long-term investors because the deal is taxable to Magellan holders. Most takeover deals involving stock as currency are tax free to holders—at least for the equity portion of the transaction—but it differs when the target is a partnership like Magellan. Oneok is structured as a corporation.
Energy Income Partners, one of the largest Magellan holders with a 3% stake, came out against the deal soon after it was announced, citing a high tax bill for long-standing Magellan holders and arguing that Magellan would be better off as an independent entity.
Much of the distributions (the partnership equivalent of dividends) from Magellan and other energy pipeline partnerships to their investors are tax deferred and those taxes would be payable with the Oneok deal, resulting in what could be taxes of $20 or more per unit for long-time Magellan holders.
Energy Income Partners has redoubled its efforts to thwart the deal, posting a letter on its website in early September, decrying what it called Magellan’s “scare tactics’ to gain shareholder approval and saying the company’s own financials “show definitely that Magellan is better off as a stand-alone company.”
Those efforts don’t appear to be gaining sufficient traction to kill the deal although the transaction faces some key hurdles. The hurdles are that Magellan needs the support of the majority of its unitholders, not just a majority of voting holders. And a sizable portion of its shareholder base is individual investors, many of whom face big tax bills. And individual investors tend to vote in smaller numbers than institutional investors in shareholder votes.
ISS and Glass Lewis are influential with institutional investors and their recommendations in favor of the deal could be important. Glass Lewis, for instance, argued that the merger would yield a “combined energy infrastructure firm with greater scale, breadth and diversity.’ ISS said the premium offered by Oneok “stands out among recent precedent transactions in the sector.”
Aaron Milford, Magellan’s CEO, told Barron’s recently that “we are working hard to make sure that unit holders appreciate the benefit of the transaction.”
On its web site, Magellan lays out the case for the deal, arguing it would create a “diversified and complimentary” company with better “growth opportunities.”
It also cites risk with remaining independent including a reliance on refined products transportation given the ongoing energy transition away from fossil fuels. That transition could affect “demand more than expected.”
On the tax issue, Magellan got an endorsement from New York tax expert Robert Willens, who wrote that “this transaction does not create tax liabilities for MMP’s unitholders. Those liabilities were always present. Instead, this transaction simply accelerates their payment.”
Energy Income Partners countered this argument by saying that Magellan “contests a truism that investors benefit from deferral of taxes because of the time value of money.” It also argues that Magellan is unduly downplaying its prospects as a stand-alone company to win shareholder approval.
Magellan, however, appears to be winning the campaign with its argument that most holders don’t have a big tax issue and that all will benefit from the premium that otherwise couldn’t be achieved.
It’s pushing hard, with one retail investor telling Barron’s in an email today that he is getting daily emails and phone calls from the company’s representatives urging him to vote. All these efforts appear to be paying off.
Write to Andrew Bary at [email protected]
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