Good Returns With MLPs : Atlas Pipeline Partners To Be Acquired By Targa Resources Partners

| About: Atlas Pipeline (APL)

Summary

The annualized spread is big (39.84%) and the conditions are not a problem.

Mutual funds are selling their stakes in oil & gas companies and this has increased the spread.

The recent decline in crude oil is a very good rationale for firms to consolidate.

Introduction

On Oct. 13, 2014, Targa Resources Partners L.P (NYSE:NGLS) (Targa) and Atlas Pipeline Partners (NYSE:APL) ("Atlas") announced the signing of a merger agreement under which Targa will acquire Atlas. Under the agreement the shareholders of Atlas will receive 0.5846 common units of Targa and $1.26 in cash per share.

The buyer group, as well as the target, is a provider of midstream natural gas and NGL services in the U.S. Targa is buying the group Atlas for a total amount of $5 billion. However, in this article we will only discuss the acquisition of one of the partnerships of the group, Atlas Pipeline Partners.

Deal Details

In order to make a quick review of the terms of the transaction I have prepared the following table, including: the type of buyer and the type of target with links to find information about them, the conditions and the potential profit.

Transaction: Atlas Pipeline Partners, L.P. To Be Acquired By Targa Resources Partners L.P

Buyer

Nationality: U.S.

Private/Public: Public

Market cap/AUM: $12.5 B

Strategic/Financial: Strategic
Hostile: No

Website

Yahoo Finance

Edgar

Target

Nationality: U.S.
Price: 0.5846 NGLS + $1.26 in cash

Market cap: $5 B
Sector: Basic Materials

Website
Yahoo Finance
Edgar

Conditions

Cash/stock: cash + stock
Premium: 15%

Termination fee: partnership 6% / Parent 3%

Merger approval: 50%

Antitrust: HSR Act

Financing condition: No

Special conditions: No
Go-shop: No

No solicitation of transactions: Yes

Availability of funds: Debt Financing Commitments

Press release / SEC Filing

12/8/2014 Spread: 9.96 %

12/8/2014 Annualized Spread: 39.84 %

Expected termination date: First half of 2015

Spread Calculation

The press release reads:

"Atlas Pipeline limited partner unitholders will receive a fixed ratio of 0.5846 units of Targa Resources Partners L.P. and $1.26 in cash for each outstanding Atlas Pipeline common unit. To increase cash flow at NGLS, its' general partner has agreed to reduce ("give-back") substantial cash flow of their incentive distribution rights over the next four years."

Therefore, the value of the offer on Dec. 12, 2014 was:

Cash consideration = $1.26 in cash

Stock consideration = 0.5846 * 43.55 (Targa) = $25.45

Therefore, the total amount is $26.71.

The spread is:

(26.71/24.29)-1)*100 = 9.96%

Assuming that the transaction will close in 3 months, the calculation of the annualized spread is:

9.96% * 12/3 = 39.84%

How do we explain the spread?

The spread is very large because of the recent decrease of oil price. If we take a look at the spread on Oct. 18, 2014:

Cash consideration = $1.26 in cash

Stock consideration = 0.5846 * 63.07 (Targa) = $36.87

Therefore, the total amount is $38.13.

The spread is:

(38.13/36.46)-1)*100 = 4.5%

In my opinion, the increase in the spread is due to big funds, which are selling gas Oil and Gas companies. The conditions of the merger agreement did not change. Therefore, I think that this spread is too large for the risk we are taking.

In addition, the merger agreement conditions are not a problem. The deal is not subject to many regulatory conditions (HSR Act only) and the deal is expected to close early (first half of 2015).

Investment idea and conclusion

I really like the symmetry of this transaction. We only risk 15% (premium) of the position. The annualized spread to gain is huge (39.84%) and it is not caused by the merger conditions, but because the big mutual funds are selling oil and gas companies like the buyer group.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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