June 29 (Bloomberg) -- Enterprise Products Partners LP agreed to buy Teppco Partners LP for about $3.3 billion, combining pipeline operators controlled by Houston billionaire Dan Duncan to create the biggest U.S. energy partnership.

Teppco owners will get 1.24 units of Enterprise for each of their units, a deal worth 15 percent more than when an initial offer was made in March, according to a statement today by the partnerships. The transaction is worth $31.36 per unit, 9.3 percent higher than Teppco’s close at the end of last week.

The takeover will increase Enterprise earnings starting in 2010 and will yield at least $20 million in cost savings, Enterprise Chief Executive Officer Michael Creel said in the statement. The partnerships, both based in Houston, will combine to own almost 48,000 miles (77,000 kilometers) of pipelines and will access the largest producing basins of natural gas, gas liquids and crude oil in the U.S., according to the statement.

“Dan Duncan will cut costs, consolidate and get operating efficiencies out of this merger,” said William L. Eddleman Jr., an analyst at Argus Research Corp. in Houston who rates Enterprise units at “buy” and owns none. “That’s one of his standard operating procedures, and I’ve seen him do this many times.”

Teppco, which traded as high as $39.12 last year, climbed $1.43, or 5 percent, to $30.12 on the New York Stock Exchange. The units had dropped 13 percent in the past year before today. Enterprise fell 33 cents to $24.96.

Fuel Line

Teppco’s assets include the 4,700-mile TE Products Pipeline system that carries refined fuels such as gasoline and diesel from the Gulf Coast to New York.

Enterprise’s strength is more in natural gas, including pipelines, processing plants and a Gulf of Mexico production platform called the Independence Hub. The offshore platform accounts for about 2 percent of U.S. gas supplies.

The Federal Trade Commission ordered Teppco in 2006 to sell its interest in a storage system after the transaction that gave Duncan control of both partnerships raised competitive concerns. Enterprise will need approval from regulators, including the FTC, to buy Teppco.

“We don’t foresee any issues with FTC approval,” Enterprise Chief Financial Officer Randy Fowler told investors and analysts today on a conference call.

Investor Payouts

Duncan’s Enterprise GP Holdings LP owns the general partners that control Enterprise and Teppco, which it purchased in 2007. Both pipeline operators are master limited partnerships, known as MLPs, which are exempt from federal income taxes and rely on assets that steadily generate cash flow that can be used to make payouts to unit holders.

As part of the acquisition, an affiliate of another Duncan company, Epco Inc., will convert its 11.5 million Teppco units to 9.72 million common units and 4.52 million Class B units of Enterprise. Epco’s Class B units won’t receive quarterly payouts for four years, foregoing more than $40 million in expected distributions, according to the statement.

Enterprise GP will get 1.33 million Enterprise units to keep its ownership interest at 2 percent. About 30 percent of the company will be owned by Enterprise GP, Epco and related companies, the partnerships said.

Duncan started in 1968 as a wholesale marketer of gas liquids with $10,000 in capital and two trucks. He built Epco through acquisitions and construction of processing plants, pipelines and storage facilities. Since going public in 1998, Enterprise has made more than two dozen acquisitions.

Richest Houstonian

In September, Forbes magazine estimated Duncan’s wealth at $7.6 billion, indicating he was the richest man in Houston. Enterprise had revenue of $21.9 billion last year, up from $738.9 million in 1998.

Barclays Plc and Andrews Kurth LLP are advising Enterprise on the transaction. Lazard Ltd. and Skadden Arps Slate Meagher & Flom LLP are counseling the audit, conflicts and governance committee of Enterprise’s general partner.

Baker Botts LLP is advising Teppco. Credit Suisse Group AG and Mayer Brown LLP are working with the independent special committee of the audit, conflicts and governance committee of Teppco’s general partner.

Morgan Stanley and Baker & Hostetler LLP are advising the audit, conflicts and governance committee of the general partner of Enterprise GP.

To contact the reporters on this story: Jordan Burke in New York at jburke29@bloomberg.net; Jim Polson in New York at jpolson@bloomberg.net.

Last Updated: June 29, 2009 16:28 EDT