Zacks_Analysts' Blog : EPD: Inorganic Growth Continues - Analyst Blog

Enterprise Products Partners, L.P. (EPD), a leading master limited partnership (MLP), and Enterprise GP Holdings, L.P. (EPE) have joined hands for a definitive unit-for-unit merger agreement. With this agreement, EPD’s long-term cost of capital will be lower and its organizational structure will be simplified. The deal is expected to be completed in the fourth quarter of 2010.

 

Following the closure of this deal, EPE will become a wholly-owned subsidiary of EPD. Consequently, EPE’s 2% economic general partner (GP) interest in EPD, the GP incentive distribution rights and about 21.6 million EPD common units currently owned by EPE will be canceled.

 

Affiliates of privately-held Enterprise Products Company ("EPCO") would continue to own the general partner of the combined entity. Under the terms of the agreement, EPE unit holders will receive 1.5 EPD common units in exchange for each EPE limited partner unit, representing a premium of around 16%, based on the closing prices of each equity security on September 3, 2010.

 

We continue to view Enterprise Products as a core holding in an MLP portfolio, given its string of organic growth projects, potential acquisitions, strong balance sheet and solid liquidity position.

 

Enterprise has been quite active on the organic growth front. Recently, it announced several new construction projects in South Texas and the expansion of its State Line gas gathering system, accommodating producers in the Haynesville shale area of Northwest Louisiana.

 

Inorganically, last year’s Teppco acquisition made EPD the largest publicly traded energy partnership. In May 2010, Enterprise also completed the purchase of two natural gas gathering and treating systems for approximately $1.2 billion from M2 Midstream LLC ("Momentum").

 

The growth momentum of EPD will be further augmented with this EPE merger as it will reduce the cost of capital, allowing the former to maintain its competitive position while pursuing growth opportunities. The partnership also expects general and administrative costs to reduce $6 million per year.

 

However, as EPD’s current premium valuation reflects all these positives, we reiterate our Neutral recommendation for Enterprise Products Partners with the Zacks #3 Rank (Hold).