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Energy Transfer Partners, L.P. (NYSE:ETP) and Energy Transfer Equity, L.P. (NYSE:ETE) announced yesterday, March 21, that ETP will acquire from ETE its interest in ETP Holdco for $3.75 billion of cash and ETP common units. ETP Holdco is the entity formed by ETP and ETE in 2012 to own the equity interests in Southern Union Company and Sunoco, Inc. ETE is the general partner of ETP. With this acquisition, ETP will own 100% of ETP Holdco. The deal is expected to close in the second quarter of 2013, subject to customary closing conditions.

Some background information is necessary before discussing issues raised by this transaction.

The $2 billion acquisition of Southern Union Company by ETE was completed on March 26, 2012. The main asset purchased via this acquisition was a 50% joint venture interest in Citrus Corp., an entity that owns 100% of the Florida Gas Transmission (FGT) pipeline system (a 5,400 mile pipeline system that extends from south Texas through the Gulf Coast to south Florida). The other 50% of FGT is owned by Kinder Morgan, Inc. (NYSE:KMI).

The $5.3 billion acquisition of Sunoco, Inc. by ETP was completed on Oct. 5, 2012. The main assets purchased via this acquisition were: 1) retail marketing operations that sell gasoline and middle distillates at retail service stations and operate convenience stores in 25 states; and 2) ETP's interests in Sunoco Logistics Partners L.P. (NYSE:SXL), a master limited partnership that owns and operates refined product pipelines, crude oil pipelines, refined product and crude oil terminals, and other assets. ETP's interests in SXL consist of a 2% general partner interest, 100% of the incentive distribution rights (IDR) and 33.53 million SXL units representing ~32% of the limited partner interests as of Dec. 31, 2012.

Holdco is an entity that was formed, and is owned, by ETP and ETE. After ETE acquired Southern Union, it contributed this asset to Holdco and received, in return, a 60% interest in Holdco. ETP therefore ended up with a 40% economic stake in Southern Union. After ETP acquired Sunoco, it contributed this asset to Holdco and received, in return, a 40% interest in Holdco. ETP ended up with a 40% economic stake in Sunoco while ETE has 60%.

In sum, ETE transferred to ETP 40% of the economic interests it acquired via the $2 billion Southern Union acquisition in exchange for ETP transferring to ETE 60% of the economic interests it acquired via the $5.3 billion Sunoco acquisition. In a prior article I noted that time will tell how fair this exchange was. Given the transaction announced yesterday, a preliminary evaluation can now be done.

ETP announced it was acquiring the 60% stake it does not own in Holdco for $3.75 billion (consisting of $2.35 billion of newly issued ETP common units and $1.40 billion in cash). To make the transaction more palatable for ETP, ETE has agreed to forego 100% of its IDR payments on the newly issued ETP units for each of the first eight consecutive quarters beginning with the quarter in which the closing of the transaction occurs, and 50% of the IDR payments on the newly issued ETP units for the following eight consecutive quarters.

Holdco currently owns and, following the transaction announced yesterday, ETP will own 100% of the assets acquired via the Southern Union Company merger and 100% of the assets acquired via the Sunoco merger. But ETP has already paid $5.3 billion (for Sunoco) and is now paying a further $3.75 billion to acquire the remainder of Holdco. In all, ETP will have paid $9.05 billion for assets that were acquired for total consideration of $7.3 billion.

At ETP's current distribution rate of $0.89375 per quarter, I calculate ETE's IDR to be $0.52 per unit. The number of ETP units to be issued is ~48 million ($2.35 billion at an assumed price of ~$49 per unit). The value of the IDRs forgone by ETE is roughly $25 million per quarter. ETE is waiving 12 full quarters (eight at 100% and eight at 50%). Even if we ignore time value of money, this amounts to only ~$300 million, a figure far too small to explain the total consideration delta.

Beyond that, analysts have estimated Holdco's enterprise value at ~$6.2 billion using a 9.5 multiple of estimated EBITDA for 2013. Using that number would further increase the delta. I cannot understand the price being paid by ETP, and I hope to see an explanation forthcoming from management. My preference for ETE over ETP has become stronger.

Source: Issues Raised By Energy Transfer Partners' Acquisition Of 60% Of ETP Holdco