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Janney Montgomery's Jody Lurie explains Linn Energy's (LINE +2%) plans for an IPO to buy up to...

Janney Montgomery's Jody Lurie explains Linn Energy's (LINE +2%) plans for an IPO to buy up to $1B in LINE shares: "In some sense the new entity serves as a proxy investment for institutional investors that cannot take advantage of MLP tax treatment." LINE will finance its acquisition of BP's Jonah Field properties with borrowings from its $3B revolver, which Janney expects funds from the IPO to repay.
Comments (6)
  • Van Hyder
    , contributor
    Comments (164) | Send Message
     
    Does anyone out there understand this? The way I'm reading it is this won't be delutitive of the MLP shares, actually the opposite since the new subsidiary will be purchasing $1B in MLP shares. Anyone see a hole in my logic?
    26 Jun 2012, 03:41 PM Reply Like
  • dsmsgs
    , contributor
    Comments (4) | Send Message
     
    I share your uncertainty. Where will the shares come from that Line New Co. will buy?
    If from the open market, a $1B purchase of shares in Line Old Co with a current market capitalization of $7.17B (ref Yahoo) will cause the shares of Line Old Co to increase in value considerably; unless they come from one or more major investors who decide that they want to sell their large positions to accommodate Line New Co. What would provide this motivation for them to bail?
    If new shares are generated, then the process is similar to a Secondary Offering. How would Line Old Co negotiate with Line New Co to set a share price without dilution?
    26 Jun 2012, 04:38 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2486) | Send Message
     
    Its basically going to act as a pass through company, passing distributions from LINE through the new company to shareholders in the new company. Some mutual funds cant get the preferential tax treatment that MLPs receive, so they cannot buy LINE. The new company will allow institutions to hold shares that will get regular 1099 forms, not K-1's come tax time. Its pretty much exploiting a tax loophole.
    26 Jun 2012, 05:02 PM Reply Like
  • 21thomas99
    , contributor
    Comments (396) | Send Message
     
    LineCo, the new company with the IPO filing, is an entity separate from the current LINN Energy. Therefore, no secondary offering. Whereas LINN Energy is a MLP, LineCo will serve as the General Partner.

     

    New shares are going to be created, but only by LineCo -- the new company, the GP. Since these are two separate legal entities, dilution does not exist in this scenario.

     

    Perhaps an illustration would best describe this? Suppose Van Hyder is LINN Energy. Van Hyder spends $1B to by Jonah Field assets. Van Hyder sees other opportunities for expansion beyond their current financing.

     

    Van Hyder, therefore, creates dsmsgs. dsmsgs is registered for its IPO. While some of the proceeds from this IPO are used for administrative purposes, dsmsgs -- as GP -- will be engaged with further acquisitions. Van Hyder keeps going along with its pipeline business.

     

    dsmsgs, however, elects to be taxed as a corporation as opposed to an MLP. This corporate taxation election by dsmsgs allows investors not able to invest in MLPs (i.e., Van Hyder) to invest in dsmsgs. On a side note, this corporate taxation means investors get a 1099 for their year-end tax filing; the MLP investors get the K-1.

     

    There will be some dilution from the $1B purchase of LINE units, but hopefully it will prove only to be a wrinkle in the long run. Thus purchase of units needs to happen, though for the GP-MLP interaction to exist. Not $1B necessarily, but the purchase, anyway.

     

    'What would provide this motivation for them to bail? ' Such investors are usually rewarded for freeing up some shares, if this were to happen with LINN Energy (a theoretical example would be to allow these investors to purchase warrants for the GP -- thus, the motivation). Hopefully this helps in clearing things up?
    26 Jun 2012, 05:18 PM Reply Like
  • 21thomas99
    , contributor
    Comments (396) | Send Message
     
    Please disregard my previous comment. I commented before having enough of the facts.
    26 Jun 2012, 05:24 PM Reply Like
  • ge12ar
    , contributor
    Comments (106) | Send Message
     
    I think it is a very creative idea but the one negative from owning LNCO is that that entity will have to pay corporate taxes and those funds will be subtracted from the amount available to pay dividends to LNCO's shareholders. If the amount that LNCO's shareholders get is not too different from the amounts received by LINE unitholders I would find LNCO a very attractive vehicle(although there is a tax deferral by virtue of LINE being an MLP that is only temporary and when one sells his units the amount deferred are taxed at ordinary rates). Does anyone know how much less the dividends will be from the distributions.
    26 Jun 2012, 05:50 PM Reply Like
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