The Deal: Regency Energy Pays Premium for PVR
PVR was surging on the news, gaining 12% to $25.65, while Regency was losing 8% to $25.61.
Holders of PVR common units, Class B units and special units will receive 1.020 common units of Regency for each PVR unit they hold and a one-time cash payment at closing estimated at $40 million. Together, the stocks and cash were valued at $28.68 per unit, a 25.7% premium over PVR's closing price Wednesday of $22.81.
Both partnerships' boards have approved the deal. The transaction is expected to close in the first quarter of 2014 if it clears PVR unitholders and Hart-Scott-Rodino.
CreditSights Inc. analysts Andy DeVries and Charles Johnston wrote in a report Thursday that Regency is paying a full multiple for PVR at 19.5 times Ebitda for the last 12 months, 17 times this year's estimated Ebitda and 14 times next year's Ebitda, versus the bidding war for Southern Union Co. that went over 10 times Ebitda ("and everybody thought that was expensive," they wrote). "While the 14 times is high relative to historic norms, that is being driven by the Fed and investors chasing yield in MLP's," they said, noting that 14 times is in line with current merged GP/LP MLP valuations like MarkWest Energy Partners LP (13.9 times) and Enterprise Products Partners LP (14.2 times).
CreditSights said it was surprised by the deal, as it expected Regency would instead get merged into Energy Transfer Partners LP. It was also surprised that Regency used equity to fund the deal, as Regency yields 6.7% while Sunoco Logistics Partners LP, also owned by Energy Transfer, yields only 3.7% and thus is a much more richly valued currency for making acquisitions.
"We understand PVR is in a different business line than SXL [Sunoco] but we assumed SXL could find its own acquisitions," it wrote.
CreditSights is also concerned about Regency picking up PVR's coal royalty business, which makes up 20% of its earnings. "While less than 10% of the combined company's Ebitda, coal is clearly a negative for MLP [master limited partnership] investors," it said. "We assume the negative of the coal business is offset by O&M [operations and maintenance] synergies."
PVR also merged with its general partner in 2011 so there are no incentive distribution rights impacting financials, CreditSights noted.The two companies claimed that the deal will create a leading gas gathering and processing platform with a scaled presence across North America's premier high-growth unconventional oil and gas plays in Appalachia, West Texas, South Texas, the Mid-Continent and northern Louisiana.