Consolidation has been a theme in the energy industry this year.
Midstream corporation ONEOK (OKE) announced in May it would acquire MLP Magellan Midstream Partners (MMP) in an $18.8 billion deal. The deal surprised the industry as it was a relatively rare example of M&A among public third parties.
The firm has said the consideration offered represents full value for Magellan unitholders. Magellan President & CEO Aaron Milford said during a livecast on August 17 that compelling reasons for the merger pertain to enhanced diversification, maximizing value, and growth potential.
Diversification Is Poised to Support a Growing Dividend
Magellan has healthy refined products and crude oil businesses “There’s no doubt about that,” Milford said. However, the combined company will be much more diversified – positioning it for sustainable dividend growth.
“When we think forward about what the pro forma has: It’s going to have a really healthy refined products business, a really healthy crude business, a really healthy natural gas liquids business, and a healthy natural gas business,” Milford said.
The combined company’s diversification of healthy businesses is very powerful from a resilience standpoint, Milford said.
“When you’re thinking really long term, [we think] that diversification adds power to the strength of dividends going forward,” he added.
Expected Synergies Between ONEOK and Magellan
Milford acknowledged there have been questions surrounding the potential synergies in the ONEOK-Magellan deal. However, he is confident the combined company will generate significant value.
“We believe that there are [going to be synergies], and as we work on our integration planning with ONEOK, we are becoming more confident in it,” Milford said. “We think synergies are going to be between $200 and possibly greater than $400 million over the next one to four years. So that’s real value.”
The additional value for both unitholder and shareholder bases from expected synergies is something Magellan couldn’t generate by itself, Milford added. “It really is driven by the combination of the two companies.”
Better Growth Prospects for a Combined Company
The diversification in the business lines coupled with the expected synergies should lead to a higher growth potential for the combined company than what Magellan would have on its own.
“We’ve been talking for a while that our capital investment opportunities are lower now than they have been in the past, and we don’t see that changing anytime soon,” Milford said. “The pro forma company is just going to have more opportunity.”
“So, you put all that together,” he said. “It’s the diversification which gives resilience. It’s the synergies: That’s more value we deliver to unitholders and shareholders than either one of us can do by ourselves. Then that all leads to a potentially higher growth rate for the combined company, which is obviously better for shareholders moving forward.”
A special meeting of Magellan unitholders will be held on September 21, 2023 to vote on the transaction.
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