Pipeline Boom Turns SemGroup Bid Into Biggest Windfall: Real M&A
Oil pipelines are in such high demand that traders are convinced SemGroup Corp. (SEMG), which emerged from bankruptcy two years ago, will get the biggest windfall of any takeover target in America by holding out for more money.
SemGroup, which owns 2,800 miles (4,506 kilometers) of pipelines in Colorado, Oklahoma and Canada, traded at $28.48 a share yesterday after rejecting an unsolicited bid from Plains All American Pipeline LP (PAA) for $24 a share. The gap was the widest of any deal in the U.S., signaling that traders are betting SemGroup will extract a higher offer less than two weeks after Kinder Morgan Inc. agreed to pay the biggest premium for a pipeline operator since 1996 to acquire El Paso Corp. (EP)
While SemGroup suffered a net loss in its first year as a publicly traded company after exiting a bankruptcy caused by $2.9 billion in trading losses, the busiest spree of industry takeovers on record may lure competing offers to the $1 billion proposal from Plains, Longbow Asset Management said. With oil above $90 a barrel, buying SemGroup would give a rival bidder access to the biggest U.S. oil-trading hub after Plains offered the lowest premium of any pipeline deal in two years.
“Plains fired the first shot, but this isn’t going to get it done,” Yemi Oshodi, managing director of M&A and special situations trading at New York-based WallachBeth Capital LLC, said in a telephone interview. “The pipeline space is attracting a lot of attention, so the market is betting someone else will come in.”
SemGroup’s shares climbed 2 percent to $29.05 at 9:38 a.m. in New York today. Plains gained 1.5 percent to $65.65.
Roy Lamoreaux, a spokesman for Plains, didn’t return a telephone call and e-mail seeking comment after declining to comment earlier this week beyond its Oct. 24 statement.
“We believe that the attractive and certain value we are proposing to deliver to SemGroup’s stockholders is greater than any value that might be created on a reasonable timetable from any of SemGroup’s other strategic alternatives,” Plains Chief Executive Officer Greg Armstrong said in the statement.
Liz Barclay, a spokeswoman at SemGroup, said in an e-mail yesterday that the bid “substantially undervalues SemGroup and fails to adequately reflect the company’s bright prospects.”
Founded in 2000, closely held SemGroup filed for bankruptcy protection in July 2008 after losses at its oil-hedging business undermined its ability to support $3.1 billion of debt. Tulsa, Oklahoma-based SemGroup exited bankruptcy the following year and became a publicly traded pipeline operator in 2010.
SemGroup, which approached its record low of $18 this month, surged after Plains said Oct. 24 that it offered to buy SemGroup on Oct. 6, in a deal valued at $1.2 billion including net debt.
The bid was 13 percent higher than SemGroup’s average price in the 20 days prior to the announcement, the lowest premium in the industry since 2009, data compiled by Bloomberg show.
The offer was also just 1.9 percent more than SemGroup’s closing price of $23.56 before the proposal was made public after pipeline operators rallied on takeover speculation.
A week before Plains announced its offer, Kinder Morgan agreed to pay $38 billion including net debt for El Paso in the pipeline industry’s biggest ever takeover, data compiled by Bloomberg show. The Houston-based companies agreed to a deal that valued El Paso at a 47 percent premium.
El Paso Takeover
The El Paso transaction pushed acquisitions in the pipeline industry to $39.6 billion so far this year, on pace to exceed the record $42.3 billion announced in 2006, data compiled by Bloomberg show.
After rejecting Plains, SemGroup climbed 19 percent above its $24-a-share offer through yesterday, more than any other pending or proposed deal in America, the data show.
Pipeline “assets are extremely coveted right now,” Rebecca Followill, Houston-based head of equity research for U.S. Capital Advisors LLC, said in a telephone interview. “The market’s saying that either Plains is going to bid higher or somebody else is going to come in with a higher bid.”
SemGroup owns 51 percent of the White Cliffs pipeline, the only pipeline that moves crude oil from the Denver-Julesburg Basin in Colorado directly to Cushing, Oklahoma, the largest hub for oil trading, according to the company’s website. It also has a 5 million-barrel storage facility in Cushing.
“Cushing is the crown jewel,” Jake Dollarhide, chief executive officer of Longbow Asset in Tulsa, Oklahoma, said in a telephone interview. “Any pipeline east to west or north to south goes through Cushing. It’s a major tollway” for petroleum and natural gas, he said.
Plains already has a 34 percent stake in White Cliffs, which it purchased from SemGroup last year.
The company wouldn’t be the first pipeline operator to become the subject of a bidding contest this year and the “laughable” price that Plains offered is leaving the door open for other potential acquirers, WallachBeth’s Oshodi said.
In July, Dallas-based Energy Transfer Equity LP (ETE) wrested away Southern Union Co. (SUG)’s natural-gas pipelines from Williams Cos. in a takeover that paid a 52 percent premium to its 20-day trading average, according to data compiled by Bloomberg.
While any sign of weakness in the U.S. economy may prevent SemGroup from getting a price that arbitragers are betting on, it could still attract companies from Tulsa, Oklahoma-based Williams to Enbridge Inc. (ENB), the largest transporter of Canadian crude to the U.S., Longbow’s Dollarhide said.
‘In a Blink’
Jeff Pounds, a spokesman at Williams, said the company doesn’t comment on takeover speculation. Jennifer Varey, a spokeswoman at Calgary-based Enbridge, declined to comment on whether it was considering a bid for SemGroup.
“The market is probably thinking there are big, well- capitalized companies out there that could step in and buy this thing in a blink,” Peter Lobravico, a New York-based vice president of merger arbitrage trading and sales at Wall Street Access, said in a telephone interview.