Transaction Details and Valuation
NS unitholders would receive 0.4 common units of SUN for each NS unit. This ratio represents a 24% premium based on the 30-day volume-weighted average price (VWAP) for both stocks, but it implies a 32% premium based on the closing prices from Friday, January 19.
The deal value of $7.3 billion represents a 9.5x multiple to 2025 consensus estimated EBITDA for NS. For comparison, the Alerian MLP Infrastructure Index (AMZI) was trading at 8.5x 2025 consensus EBITDA as of January 19 based on a weighted average.
Rationale and Potential Benefits
The combination would provide diversification and scale while giving SUN more exposure to more traditional midstream businesses – pipelines and storage for both crude and refined products. While SUN has extensive refined product assets, the deal would provide an entry into both crude and ammonia. SUN noted opportunities to expand NS’s ammonia system and to leverage NS’s Midwest footprint to expand SUN’s fuel distribution segment. SUN management also sees opportunities for its Brownsville, Texas, terminal given NS’s premier refined product system in South Texas.
In terms of synergies, SUN expects $150 million in run-rate synergies by the third year following the close. SUN expects an incremental $50 million in savings from refinancing $1.6 billion of NuStar’s preferred equity, subordinated notes, and revolver borrowings. The transaction is expected to be 5% accretive to distributable cash flow (DCF) per unit in the first year and 10% accretive to DCF/unit in year three. SUN expects to achieve its targeted 4.0x leverage ratio within 12-18 months of the deal’s closing, with the $1.0 billion sale of convenience stores to 7-Eleven announced earlier this month expected to help in meeting the leverage goal.
NS has maintained a flat quarterly distribution of $0.40 per unit since cutting its payout in 2020, while SUN maintained its payout through the pandemic. In May 2023, SUN grew its distribution for the first time since 2016. SUN’s management noted that the transaction enhances their ability to execute on multi-year distribution growth discussed previously. NS unitholders are expected to receive a one-time special distribution of $0.212 per common unit prior to the deal’s close.
Assuming the deal is ultimately completed, this would mark the loss of one more MLP in a space that continues to see consolidation. M&A was a tailwind for MLP performance in 2023, with the AMZI gaining 23.8% on a total-return basis last year. While difficult to predict future transactions, M&A could again be supportive for performance in 2024. At writing, AMZI is noticeably outperforming broader energy and broad market indexes intra-day with NS shares up over 15%. More broadly, the premium offered and implied EV/EBITDA multiple reinforce the value of MLPs broadly.
For SUN and NS, the combination would result in a more diversified business with enhanced growth opportunities. The combined company would also be stronger financially with likely improved potential for future distribution growth.
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