Last year, mergers in the energy industry tallied a record-setting $402 billion. We’re already off to a good start in 2013, with several deals already announced and more likely to come as buyers salivate and sellers dream of a big payday. While getting a deal done is a complex process in and of itself, it takes on another level of complexity in the midstream industry.
As you’re probably aware, most master limited partnerships, or MLPs also have a general partner that they’re beholden to. Sometimes those GPs are publicly traded, in which case getting a midstream deal done can mean placating four sets of investors. Having a supportive general partner is very important in the the industry and can be a competitive advantage for completing a deal.
Take Kinder Morgan Energy Partners LP (NYSE:KMP) and its recently announced deal for Copano Energy, L.L.C. (NASDAQ:CPNO). Including debt being assumed, the $5 billion deal is a fairly large acquisition for anyone to swallow. One of the keys in getting the deal to pass muster is that Kinder Morgan Energy is receiving some relief from its general partner, Kinder Morgan Inc (NYSE:KMI).
As you probably know, one of the benefits of being the general partner is that it typically comes with incentive distribution rights, or IDRs. These give the GP an increasing share of the incremental distributable cash flow that the MLP generates. To get the Copano deal to make sense (and cents), Kinder Morgan agreed to forgo a portion of its incremental incentive distributions in 2013 and beyond.
Because a portion of the incremental IDRs were waived, the transaction will be modestly accretive to Kinder Morgan Energy unitholders this year while being about $0.10 accretive for the next five years. Investors of both companies win, as both will see the increased income that’s now available to be sent back to investors. Without waiving those incentive distribution rights, the deal probably would not have been possible.
Other midstream peers are using similar models to get deals done that the MLP probably couldn’t have done otherwise. Take Boardwalk Pipeline Partners, LP (NYSE:BWP), whose general partner is owned by diversified holding company Loews Corporation (NYSE:L). The company’s subsidiaries include hotels, insurance, offshore drilling, and exploration and production, Loews has a uniquely diverse business as well as a deep financial strength.
As the owner of Boardwalk’s general partner, Loews has incentives to help Boardwalk out if an attractive asset comes along. Just last year it helped Boardwalk to acquire HP Storage as it took an 80% equity interest in the asset, which it held until it could be sold to Boardwalk in a drop-down transaction. The companies later teamed up in a deal that enabled Boardwalk to acquire PL Midstream. Both deals have worked out well for Boardwalk, so more are likely in the future.