Enterprise Products Partners LP, the largest U.S. pipeline operator, agreed to buy Enterprise GP Holdings LP for more than $8 billion, combining two of the partnerships founded by the late billionaire Dan Duncan.
Owners of Enterprise GP will receive 1.5 Enterprise Products units for each of their units, the Houston-based partnerships said today in a statement. The transaction will reduce Enterprise Products’ cost of capital by eliminating special rights that Enterprise GP has to distributions from the partnership, according to the statement.
The purchase comes five months after the death of Duncan, whose $9 billion fortune made him Houston’s richest man. Enterprise Products cut costs last year by buying another affiliated partnership, Teppco Partners LP. The latest deal will reduce administrative expenses by $6 million a year and simplify Enterprise’s partnership structure, according to the statement.
“Lowering their cost of capital by removing the general partner really puts them in the driver’s seat to generate above- average returns on invested capital,” said Darren Horowitz, an analyst at Raymond James in Houston who has a “strong buy” rating on Enterprise Products units and doesn’t own any.
The purchase price of $57.68 per unit is 18 percent higher than Enterprise GP’s 20-day moving average. The average premium in U.S. pipeline acquisitions announced in the past two years was 15 percent, according to Bloomberg data. Enterprise Products is paying 7.31 times profit before interest, taxes, depreciation and amortization, compared with a median multiple of 8.
Enterprise Products fell 32 cents to $38.13 as of the 4 p.m. close of New York Stock Exchange composite trading. Enterprise GP jumped $5.85, or 12 percent, to $55.75.
As a so-called master limited partnership, or MLP, Enterprise Products is exempt from federal income taxes and pays out most of its cash flow to unit holders. An affiliate of closely held Enterprise Products Co., known as Epco, owns a controlling stake in Enterprise GP and agreed to waive more than $275 million of cash payments in the first five years after the transaction closes.
Based on Enterprise Products’ rate of distributions in August, the acquisition will increase quarterly payouts to Enterprise GP owners by 54 percent, according to the statement.
The transaction is scheduled to close by the end of this year, the partnerships said. It will be “nominally dilutive” to Enterprise Products’ cash flow available for investor payouts in the first year and will be breakeven or accretive to cash flow in the fourth and fifth years, the partnerships said.
Enterprise Products has 49,100 miles (79,000 kilometers) of natural-gas, oil and refined-fuel pipelines, as well as storage capacity for 27 billion cubic feet of gas and 190 million barrels of liquids.
Enterprise GP owns non-controlling stakes in Dallas-based Energy Transfer Equity LP and its general partner.
Duncan formed Epco in 1968 with $10,000 and two trucks, according to a company biography. After starting the business to sell gas liquids, he expanded into pipelines, storage and processing plants.
Barclays Plc advised Enterprise Products on its latest acquisition, and Credit Suisse Group AG advised a committee of its general partner. Morgan Stanley advised Enterprise GP’s general partner committee.
Legal advisers were Andrews Kurth LLP and Morris, Nichols, Arsht & Tunnell LLP for Enterprise Products; Skadden, Arps, Slate, Meagher & Flom LLP for Enterprise’s general partner; Vinson & Elkins for Enterprise GP and Baker Hostetler and Richards, Layton & Finger for Enterprise GP’s general partner.