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Yesterday, Energy Transfer Partners (ETP) announced the cash consideration option for its pending purchase of Sunoco (SUN) was oversubscribed, creating a near term opportunity to short ETP.

According to the preliminary results of the elections made by SUN shareholders regarding the form of consideration to be received, almost 74 percent of SUN shareholders selected that choice.

Among other factors, it is possible this will likely lead to some near term pressure on ETP units as those holders of SUN shares which received, but did not want, ETP units sell the unwanted units as quickly as possible. We believe SUN shareholders behavior could unfold as follows:

  • Unit Only Election. Out of a total of almost 105 million shares of SUN, only 4.2% of SUN owners elected to receive only units. These SUN shareholders will receive 1.049 ETP units and no cash for each SUN share, and this election was worth $44.27/SUN share based on Monday's closing price. Once the deal closes on Friday, these holders will hold ~4.7 million units of ETP, and these holders are likely to hold onto their ETP units.
  • Standard Election. 2.6% of SUN shareholders elected to receive the standard election of $25 cash and 0.5245 ETP units for each share of SUN. This election was worth $47.13 per SUN share based on Monday's closing price, and these shareholders will receive ~1.4 million ETP units. Like the unit only group, once the deal closes on Friday, these holders are likely to hold onto their units.
  • No Election. 19.2% of SUN shareholders made no election and will receive the standard election of $25 of cash and 0.5245 ETP units each SUN share they hold. Like the Standard Election, this election was worth $47.13 per SUN share based on Monday's closing price. These shareholders will receive ~10.6 million ETP units. Like the Standard Election group, once the deal closes on Friday, these holders are likely to hold onto their ETP units.
  • Cash Only Election. 73.9% of SUN shareholders elected to try to maximize their return and receive cash only. Unfortunately for these shareholders, while this would have been $50 of cash had this deal not been subject to proration, proration will adjust their compensation to be $26.44 of cash (more cash than the standard election as some SUN shareholders elected to take no cash) and 0.4944 ETP units for each SUN share. This election was worth $47.40 per SUN share based on Monday's closing price. For any number of reasons (ex. Selling to lock in gains, selling because they are not mandated to hold MLP units, etc.), these holders are likely to try to sell their ETP units as quickly as possible. Total units given to holders who made the Cash Only Election are expected to be ~38.3 million units.
    • Prior to closing this deal, ETP had a total of ~245 million common units and ~55 million ETP units will be issued as consideration in this deal.
    • ETP's recent trading volume has averaged ~1.5 million shares per day.
    • SUN shareholders who are able to short are likely to begin to short ETP units prior to the deal closing to get ahead of any selling pressure.

Note: Had ETP units been trading above $47.66 on Monday, the final election day for SUN shareholders, the profit maximizing choice on Monday would have been the Unit Only Election.

Source: Sunoco Acquisition Closing To Put Near-Term Pressure On Energy Transfer Partners?