TGE: Take-Private Bid Highlights Continued Private Equity Interest in Midstream
Last night, Tallgrass Energy (TGE) announced that it received a take-private bid from its private equity sponsor, Blackstone Infrastructure Partners, which currently owns a 44.2% stake in TGE. If accepted, Blackstone would acquire all remaining TGE shares for $19.50 per share in an all-cash transaction, representing a 35.9% premium to TGE’s closing price yesterday. Based on Bloomberg estimates, the transaction represents a 10.0x multiple based on consensus 2020 EBITDA of $930 million. It’s important to note that the offer is subject to a vote by TGE’s conflicts committee and has not yet been approved.
What does a potential TGE buyout mean for MLPs and midstream?
In March, Blackstone Infrastructure Partners bought out TGE’s general partner and acquired a controlling stake in the company for $3.2 billion, which provided its current ~44% ownership interest. Tallgrass has faced some headwinds recently, including concern over recontracting risk on its Rockies crude pipelines (particularly Pony Express and Rockies Express) due to increased competition from new pipelines and expansions. TGE shares have declined nearly 40% since Blackstone acquired a controlling interest and have fallen more than 25% this month through August 27, making a takeout more attractive to Blackstone given lower price levels. Blackstone’s offer price represents TGE’s share price near the end of July – $19.50 per share. Since the end of July, the AMZI is down 10.0%, while the broader market represented by the S&P 500 is down 3.7% in what has been a difficult month across energy.
Yesterday’s buyout offer continues the trend of significant private equity involvement in midstream. Private equity has invested billions in midstream this year and often at a premium to public equity market valuations, with some assets being sold for 13x EBITDA or higher. While the TGE transaction multiple based on forward EV/EBITDA is not as strong as the recent agreement for Buckeye Partners (BPL) or some recent asset-level private equity deals done at 13x or more, the 35.9% equity premium is meaningful. The proposed transaction’s 10.0x multiple represents a slight premium to the weighted average forward EV/EBITDA multiple for the constituents of the Alerian MLP Infrastructure Index (AMZI), which were trading at 9.7x 2020 EBITDA as of yesterday’s close.
As we noted above, Blackstone’s bid does not constitute a binding agreement, and it’s possible TGE management may attempt to negotiate the terms of the offer. Earlier this year, ArcLight Energy Partners raised its offer price for American Midstream Partners to $5.25 per unit from $4.50 per unit after investors were unhappy with the initial bid. Given the broad disconnect between how public and private markets value midstream companies and their assets, private equity may provide a floor for valuation. Notably, midstream MLPs are outperforming broader markets and oil today following TGE’s announcement.