Devon, Crosstex Form Midstream Company to Combine Assets

Devon Energy Corp. (DVN) and Crosstex Energy Inc. agreed to form a new business that will acquire all of Crosstex’s shares and combine the two companies’ pipelines and processing facilities.

The to-be-named entity will consist of a master-limited partnership and a general partner controlling it, both of which will be publicly traded, Devon and Crosstex said in a joint statement today. Shareholders in Dallas-based Crosstex, which had a market capitalization of $983 million yesterday, will each receive one unit in the general partner and a one-time payment of about $2 a share.

Devon, which will control both of the partnerships and be the new company’s largest customer, is contributing assets valued at $4.8 billion. The business will have about 7,300 miles (12,000 kilometers) of pipelines, 13 processing plants and six fractionators as well as storage, terminals and a trucking fleet to move oil and natural gas.

“This deal is like marrying your high school sweetheart,” Ethan Bellamy, a Denver-based analyst for R.W. Baird & Co., wrote in an e-mail. “Crosstex provided excellent customer service to Devon for its midstream needs for years, and that proved to be the foundation of this merger.”

The new company will have an enterprise value of about $8.84 billion, he estimated.

Crosstex Rise

Both Crosstex and Crosstex Energy LP (XTEX), the partnership it controls, rose by the most since May 2009. Crosstex gained 51 percent to $31.10 at 11:14 a.m. in New York while Crosstex Energy LP climbed 35 percent to $27.48. Devon, based in Oklahoma City, increased 2.4 percent to $64.72.

The new company is expected to have adjusted earnings before interest, taxes, depreciation and amortization of about $700 million next year, according to the release. Its assets will be in the Barnett Shale, Permian Basin and Eagle Ford in Texas, as well as the Haynesville, the Utica of Ohio and the Marcellus in the eastern U.S.

Devon said in June it planned to form a master-limited partnership to own a minority stake in its U.S. midstream business. At the time, Devon said it planned to use proceeds to fund continuing operations. The master-limited partnership structure is attractive for assets like pipelines with steady returns because an MLP doesn’t pay corporate income tax and has more cash available to return to investors.

Shareholder Support

The transaction, expected to close in the first quarter is structured to be tax-free, the companies said. It’s subject to shareholder and regulatory approvals. Holders (XTXI) representing about 22 percent of Crosstex’s outstanding shares, including Blackstone Group LP, have agreed to vote in favor of the deal.

Bank of America Corp. served as financial adviser and Vinson & Elkins LLP provided legal advice to Devon. Crosstex and various special committees associated with the company or its partnership were advised by Greenhill & Co., Citigroup Inc., Simmons & Co. and Evercore Partners Inc. Baker Botts LLP, Richards Layton & Finger PA, Potter Anderson Corroon LLP, Morris, Nichols, Arsht & Tunnell LLP gave legal advice.

To contact the reporters on this story: Edward Klump in Houston at eklump@bloomberg.net; David Wethe in Houston at dwethe@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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