Sunoco Logistics Partners Has Advantage In Merger With Energy Transfer Partners

| About: Sunoco Logistics (SXL)


SXL and ETP, two sister companies of the ETE Group, announced that today they will be merging.

Why the merger is positive to SXL?

I view that the deal favors SXL shareholders and puts ETP shareholders at a disadvantage.

The merger is likely to go through because ETE, the parent company of both SXL and ETP, will be controlling the merger votes.

SXL shares are selling off on the news and provide a great buying opportunity.

It was just announced today that Sunoco Logistics Partners (NYSE:SXL) and Energy Transfer Partners (NYSE:ETP) have entered into a merger agreement providing for the acquisition of ETP by SXL in a share-for-share transaction. The transaction was approved by the boards of directors of both companies and is expected to close in the first quarter of 2017 subject to receipt of ETP's shareholder approval and other customary closing conditions.

Under the terms of the transaction, ETP shareholders will receive 1.5 share of SXL for each share of ETP they own. Effectively, ETP shareholders are not receiving any premium based on the closing prices of the prior day.

It is worth to note that both SXL and ETP are sister companies and part of the same family, the Energy Transfer Equity, L.P. (NYSE:ETE) family. The parent company ETE has agreed to continue to provide all the incentive distribution right subsidies that are currently in effect with respect to both ETP and SXL.

Why the merger is positive to SXL?

  1. The transaction is expected to be immediately accretive to SXL's distributable cash flow per common unit and is also expected to allow the combined partnership to be in position to achieve near-term distribution increases in the low double digits and a more than 1.0x distribution coverage ratio.
  2. The combined entity will have increased scale and diversification across multiple producing basins and will have greater opportunities to integrate SXL's natural gas liquids business with ETP's natural gas gathering, processing and transportation business.
  3. The merger will achieve cost savings while enhancing the service capabilities for their customers. SXL and ETP expect that the transaction will allow for commercial synergies and cost savings in excess of $200 million annually by 2019.
  4. The transaction is also expected to strengthen the balance sheet of the combined organization by utilizing cash distribution savings to reduce debt and to fund a portion of the growth capital expenditure programs of the two partnerships.

More about SXL

  • SXL currently yields 7.8%.
  • SXL recently reported its Q3 results, which showed a 10% increase in earnings and distributable cash flow, based on the same period last year.
  • The company declared its 46th consecutive quarterly dividend increase.
  • The Q3 2016 distributions were 11% higher compared Q3 2015 distributions.
  • Dividend coverage ratio is close to 1 times.
  • SXL is undertaking a series of growth projects which I expect it will keep pushing its distributable cash flow streams higher, enabling continued dividend growth, which is the most attractive feature for this company. Looking ahead, it appears the company's DCF should move higher over the next quarters and throughout 2017.

Following the news of the merger, both SXL and ETP are selling off. SXL is currently down by 7.9% and ETP is down by 8.4%. I attribute the selloff to the fact that ETP shareholders will see a dividend cut by about 30%. ETP currently yields 10.7%; and once they convert into SXL shares, the effective dividend yield will become 7.8% - which is the yield paid by SXL - since there is no premium involved in the transaction. This is a significant dividend cut for ETP shareholders. We should note, however, that this is positive for the combined entity as it will allow to significantly reduce its debt in the future.

The way it looks, SXL shareholders are at an advantage here because they are likely to see their dividend grow at a faster pace going forward. ETP shareholders are at a disadvantage as they will see a dividend cut. I expect that the merger will go through anyway, because the ETE, the parent company of both SXL and ETP, is likely to be controlling the votes.

I view the current selloff in SXL shares as a buying opportunity.

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Disclosure: I am/we are long SXL, ETE, SUN.

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