Inergy Midstream LP (NRGM), the pipeline partnership that began trading publicly 18 months ago, agreed to buy Crestwood Midstream Partners LP (CMLP) for $1.61 billion in stock and cash, adding natural gas processing capabilities as it seeks to capitalize on rising U.S. output of the fuel.
Crestwood Midstream holders will get 1.07 Inergy Midstream units for each unit they own and a one-time cash payment of $35 million, according to a statement today from the two companies. The cash portion wouldn’t be paid for units held by Crestwood Holdings LLC. For the other holders, the deal values Houston- based Crestwood at a 14 percent premium to the May 3 closing price, according to data compiled by Bloomberg.
Crestwood Chairman and Chief Executive Officer Robert G. Phillips will run the combined company from Houston, with operations in Kansas City, Missouri, where Inergy is based. Upon the deal’s closing, current Inergy LP (NRGY) unit holders will own 56.4 percent of the new Inergy LP, Crestwood Holdings LLC will own 29 percent and Inergy management will own 14.6 percent.
“With this combination, we will truly begin to experience the power of the value chain growth strategy by offering our customers a more comprehensive and competitive suite of services,” Phillips said in the statement. The combined company will have operations in every major U.S. shale play, Phillips said on a call with analysts.
Need for Size
The deal highlights the need for size and scale in the pipeline business, which is dominated by master-limited partnerships, or MLPs, Hinds Howard, a fund manager at Guzman Investment Strategies LLC in Austin, Texas, wrote in an e-mail today. Bigger companies have lower costs and can afford to make the large investments needed to connect emerging oil and gas fields to markets, he wrote.
“In the high growth areas like the Marcellus Shale, gaining a foothold in a play may require large capital outlays, for cash flow that won’t come online for years,” he wrote. “That’s difficult for a smaller MLP to do.”
The agreement consists of three transactions. In the first, Crestwood Holdings will buy Inergy LP’s general partner for $80 million in cash. Crestwood will then contribute assets to Inergy LP in exchange for units. Finally, Inergy Midstream will buy Crestwood Midstream’s units.
Crestwood has about 60 million partnership units outstanding, according to a document provided by the company.
The last of the transactions is expected to close in the third quarter, the companies said.
Crestwood processes gas in basins that include the Marcellus Shale in Pennsylvania and the Barnett Shale of Texas. Inergy owns gas storage and has a crude terminal in North Dakota, the second-biggest oil-producing state.
Inergy LP rose 7.9 percent to $23.75 at the close in New York, the most since April 26, 2012. Inergy Midstream fell 5.7 percent to $22.78. Crestwood gained 3.6 percent to $24.70, the most since January.
Citigroup Inc. was Crestwood’s financial adviser and Simpson Thacher & Bartlett LLP and Akin Gump Strauss Hauer & Feld LLP served as legal counsel. Evercore Partners Inc. and Morris, Nichols, Arsht & Tunnell LLP advised Crestwood Midstream’s board.
Greenhill & Co. and Jefferies Group LLC advised Inergy LP and Inergy Midstream. Vinson & Elkins LLP was legal counsel. SunTrust Robinson Humphrey Inc., Richards, Layton & Finger PA, Tudor Pickering Holt & Co. and Potter Anderson & Corroon LLP also advised.
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