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Marathon Petroleum Corp. (NYSE: MPC) poured $400 million of sweetener on its deal for MarkWest Energy Partners LP (NYSE: MWE) on Nov. 10.
But a former MarkWest executive remained staunchly opposed to a deal that he said pays “pennies on the dollar” for the company.
Marathon agreed to raise the cash contribution of the merger between its MLP, MPLX LP (NYSE: MPLX) and MarkWest to $1.075 billion from $675 million. The deal would make MarkWest a wholly owned subsidiary of MPLX.
Some critics were not appeased. John Fox, former CEO, chairman and director of MarkWest Energy GP LLC, which manages the MarkWest MLP, wasn’t placated by the new offer.
Based on MPLX's closing price on Nov. 10, the deal terms are “still 33% below the initial implied deal terms outlined in July,” he said. “This is still a bad deal for all MarkWest unitholders.”
Kristina Kazarian, analyst, Deutsche Bank Securities Inc. said the new offer suggests a total consideration of $52.93 for MarkWest—a 21% premium to its last close. The revised merger agreement gives MarkWest common unitholders 1.09 MPLX common units plus a one-time cash payment of about $5.21 per MarkWest common unit.
“This is -11% below its close prior to the deal (July 10, 2015),” she said, but “we continue to like both MWE and MPLX at these levels and reiterate our support for the deal.”
Kazarian said the updated offer “firmly addresses the one main critique from investors for the deal: near-to-medium term dilution on MWE distributions.”
Under the new terms and the revision last week of MarkWest’s distribution per unit, MarkWest unitholders stand to gain considerably, she said.
MarkWest unitholders should respond favorably since distributions will be $1.69 higher than the MarkWest base case on a nominal basis and $2.38 higher than on a discounted basis.
“We think this immediate accretion helps fix the deal for many unitholders and thus our confidence in its passage has improved considerably,” Kazarian said.
Fox continued to dismiss the deal, which he said puts $10.2 billion of future cash flow into Marathon’s coffers instead of unitholder’s bank accounts.
On Nov. 4, he denounced the deal for its low payout to MarkWest unitholders. Fox said the initial offer cut distributions to MarkWest unitholders by “an estimated 46% with only intent to get back to parity in three to five years.” Fox owns 1.4 million MarkWest common units.
Opposition
Fox said the $675 million cash payment would be paid back to Marathon in less than three years through incentive distribution rights (IDR) to Marathon. Fox described the IDR as rights to payment of an increasing percentage of the cash distributed, and they are generally held by an MLP’s general partner.
Fox has launched the website, iamvotingno.com, which calls the merger a “bad deal.” Fox did not update his website and did not respond to a request for comment through an intermediary.
The merger has been recommended by the boards of directors of MPC, MPLX and MarkWest and is supported by executive management of both partnerships.
MarkWest is the second-largest gas producer in the U.S. and processes about 75% of total rich-gas production from the Marcellus and Utica.
Kazarian said MarkWest and MPLX are trading well below reasonable levels and a merger would make them stronger.
MPLX stands to add an excellent midstream Marcellus/Utica footprint at the bottom of the cycle as well as a considerably large organic growth backlog, she said. MarkWest would also improve, adding “a better cost of capital, a strong sponsor and higher growth.”
Marathon and its MLP would assume all of MarkWest’s cash and about $4.2 billion in outstanding debt.
MarkWest would also gain access to a portfolio of $1.6 billion in MLP-eligible EBITDA, the companies said.
It would also own 71% of the merged company, followed by Marathon (21%) and MPLX (8%). Marathon will also contribute approximately $225 million, based on the price of MPLX's common units on Nov. 10 to maintain its 2% general partner interest in MPLX.
"The enhancement to the terms of the agreement reflects the commitment of MPC and MPLX to the combination with MarkWest and conviction that the transaction will create significant benefits for the unitholders, customers and employees of both partnerships," said Gary R. Heminger, MPC president and CEO. "This increase substantially enhances the transaction value for MarkWest unitholders.”
Darren Barbee can be reached at dbarbee@hartenergy.com.
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