What Happened Last Week: Why the AMID/JPEP Merger Made MLP History

One might have thought the most interesting energy infrastructure news last week was that Energy Transfer Partners (ETP) is buying the GP and a 65% interest in (although not fully acquiring) PennTex Midstream Partners (PTXP). It was certainly the biggest news, but ETP has gone shopping before and it will go shopping again. Their ownership chart gets more and less complicated as the years pass.

Without a lot of major media coverage (really, none that I could find), American Midstream Partners (AMID) bought JP Energy Partners (JPEP). And, I know, the combined two-billion-dollar entity is still considerably smaller than the $17 billion ETP. But, this merger made MLP history as it’s the

<p>Oy! MLP history buffs trying to get in your “gotcha” moment: I know Vanguard Natural Resources (VNR) has bought Eagle Rock (former ticker: EROC), LRR Energy Partners (former ticker: LRE), and Encore Energy Partners (former ticker: ENP). Breitburn Energy Partners (BBEP) also bought QR Energy (former ticker: QRE), although BBEP was arguably a mid-cap name. But all of those are upstream names which must necessarily replace their depleting reserves just to stay flat. And CVR Partners (UAN) bought Rentech Nitrogen Partners (former ticker: RNF), but again, we’re talking about midstream.</p>
<p>The best case you could make would be Valero LP (former ticker: VLI) buying Kaneb Services (former ticker: KSL) and Kaneb Pipe Line Partners (former ticker: KPP) in 2004. They’d be considered small- and mid-cap names by traditional “finance standards,” as the joint entity had a market cap of $2.8 billion. But in fact, when retroactively applying Alerian’s MLP size index standards, KPP used to be a large-cap MLP in 2004, NS was a mid-cap, and KSL was a small-cap name.</p>
<p>If you’re playing along at home and just reading the footnotes because that’s how you roll, the entire MLP space had a market cap of $51 billion in 2004. VLI has since been rebranded as NuStar Energy (NS).“>very first small-cap to small-cap merger the midstream MLP space has seen.

It’s worth noting that ETP fell 1.7% on its news, while AMID fell 2.0% and JPEP rose a whopping 11.3%. Now tell me which one you’re more interested in. With a small company, you may ”text-decoration: underline;">take on more risk, but it takes less for management to move the needle.

Is it a trend? Well, one data point is not a trend until other companies follow. However, it does go against a noticeable MLP trend: when a small cap MLP is taken out, it’s nearly always taken out by a large-cap MLP. The most similar historical merger would be the Crestwood-Inergy merger in 2013 which combined two mid-cap names to create a larger, more vertically integrated MLP providing nearly all necessary midstream services (gathering and processing, transportation, storage) to their shale customers.

Counterpoint to AMID-JPEP starting a small-cap with small-cap merger trend: they share a general partner in ArcLight Capital Partners, so despite the benefits of economies of scale and vertical integration, this merger could simply have been driven by ArcLight’s desire to have the same assets, but one less public company.

The benefit to unitholders of the ArcLight sponsorship is that while public owners get 0.5775 units of AMID for each unit of JPEP, ArcLight only gets 0.5225 AMID units. Said another way, ArcLight is taking a 9.5% discount to what the public’s getting. Said a third way, it’s the blended price of 0.55 units that’s generally used to determine the deal’s premium, but the public is actually getting a slightly better deal.

Speaking of sponsors, financing can also be an impediment to mergers, and small-caps typically have more difficulty than their bigger siblings. In the case of AMID-JPEP, it was an all-unit deal, so financing wasn’t a factor. However, for other companies looking to merge, a strong sponsor can help with debt or cash, if necessary.

How many other small-cap to small-cap midstream mergers can make sense right now? Sorting through the 59 constituents of the Alerian Small Cap MLP Index (AMSI), there are only 21 midstream names, which are listed below.