To execute the deal, Crestwood will assume control of Inergy’s “general partner” and distribute units of Inergy stock to all Crestwood shareholders as of a yet-to-be-determined record date at a ratio of 1.07-to-one. Simultaneously, Crestwood shareholders will receive payments of $1.03 per unit. On a respective basis, Crestwood and Inergy will kick in $25 million and $10 million to cover the cost of this distribution.
It should be noted that Inergy Midstream Partners (NRGM), a wholly-owned subsidiary of Inergy L.P., will play a central role in this transaction. Upon completion of the transaction, the subsidiary’s unitholders will own nearly 20 percent of the new partnership. Meanwhile, Inergy’s own unitholders will own nearly 30 percent of the entity. Crestwood Midstream’s current unitholders will enjoy ownership of about 14 percent of the company, and the two merging entities themselves will own the bulk of the remaining shares.
Monopoly Worries and Potential Complications
This deal has already attracted the attention of shareholder’s-rights advocates who argue that it substantially undervalues its components, and it is entirely possible that it will need to be reworked before its completion.
More importantly, some market-watchers worry that this transaction sets up the possibility of a quasi-monopoly in the midstream shale gas business as the combination will involve a substantial amount of the overland natural gas distribution infrastructure in the south-central and eastern United States. What’s more, the combination of Inergy, L.P. (NYSE:NRGY)’s close relationships with several large utility companies and Crestwood Midstream Partners LP (NYSE:CMLP)’s favorable agreements with drilling and extraction firms could lead to a vertically integrated arrangement that raises the cost of natural gas for end-users. In spite of this, few market-watchers seem to be talking about the possibility of enhanced regulatory scrutiny or approval delays.
In sum, this deal offers a unique opportunity for investors to profit from the continuing North American shale gas boom. Further information on how to play natural gas can be found here. The two partnerships provide exposure to the space without the volatility and risk associated with pure-play drilling and exploration firms. At the same time, potential legal actions and the potential for a quasi-monopoly in certain parts of the country might give investors pause. Although the best way to play this deal may be through a long position in Inergy, investors are advised to conduct their own due diligence before proceeding.
The article Merger Looks To Create Formidable Shale Gas Hybrid originally appeared on Fool.com and is written by Mike Thiessen.
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