Do mergers and acquisitions (M&A) create or destroy shareholder value? As with most things, the correct answer is: “it depends.” Academic studies have reached conflicting conclusions. A 2004 study by consulting firm Mckinsey & Co. found that 70% of mergers failed to achieve the amount of cost-saving synergies forecasted at the time the deal was announced.
But a more recent 2009 study found that most mergers create value, with value destruction limited only to the very largest “mega mergers.” Even McKinsey has concluded that corporate acquirers are getting savvier in choosing acquisition targets and that mergers consummated in 2010 created more net value than at any time since McKinsey started evaluating mergers in 1997. The key to merger success appears to depend on strategy and execution.
The poster children of bad mergers include the 2000 merger of Time Warner with America Online and the 1999 merger of Germany’s Daimler with Detroit’s Chrysler. But some mergers have been successful, like the mergers of Exxon with Mobil (1999), Walt Disney with Pixar (2006), and Apple with NeXT (1997).
And Roger Conrad, associate editor of Personal Finance, has written that all mergers of “essential service” companies are successful because utilities are scale businesses that can offer services more inexpensively when they can spread fixed costs over a larger subscriber base:
Every one of the thousands of power, natural gas, and water utility mergers since the 1800s has created a stronger company. Utility mergers and acquisitions are uniquely successful because essential services are fundamentally scale industries. The added complexity of becoming larger companies is far offset by the cost savings and business synergies.
Companies tend to finalize merger negotiations over the weekend and announce deals on the first day of the following workweek. Consequently, the nickname “Merger Monday” was born. If Monday is a holiday or negotiations hit a snag and need a bit more time, the merger announcement can be delayed a day – hence, the secondary nickname “Takeover Tuesday.”
Merger Monday Focuses on Energy
With this merger background in mind, three M&A deals totaling $51.8 billion were announced on Monday October 17th, the largest dollar amount of deals on a Merger Monday since March 21st. when AT&T announced its intent to acquire Deutsche Telekom’s T-Mobile USA subsidiary and Charles Schwab announced it was buying optionsXpress.
All three deals are focused on energy. Coincidence, or is energy ready to take off? Without further adieu, here is a summary of today’s three energy deals:
1. Kinder Morgan (NYSE: KMI) Buys El Paso (NYSE: EP)
Kinder Morgan’s offer is currently worth $26.87 per share (a 37% premium over El Paso’s pre-announcement price) and is a bit complicated in three parts: (1) $14.65 in cash, (2) 0.4187 KMI shares (valued at $11.26 per EP share) and (3) 0.640 KMI warrants (5-year term with a $40 strike price) that are valued at $0.96 per EP share based on KMI’s closing price of $26.89 last Friday (Oct. 14th). Subject to pro-ration, EP shareholders will be able to elect, for each EP share held, either (i) $25.91 in cash, (ii) 0.9635 shares of KMI common stock, or (iii) $14.65 in cash plus 0.4187 shares of KMI common stock.
Hedge-fund manager Daniel Loeb, who recently bought a 5.15% ownership stake in Yahoo!, won big on this deal because his hedge fund owns 13 million shares of El Paso. Roger Conrad of Personal Finance evaluated the deal this way:
Adding assets is the formula for cash flow and distribution growth at master limited partnerships (MLP). Kinder’s debt burden from the deal will be reduced from the planned sale of El Paso’s oil and gas production assets. And there are numerous opportunities for growth as well by extending and expanding the combination’s 80,000 mile-plus pipeline network, which reaches every major shale-producing region in the country.
2. AmeriGas Partners (NYSE: AGU) Buys Propane Assets of Energy Transfer Partners (NYSE: ETP)
Amerigas, the nation’s largest retail propane marketer, will pay $1.5 billion in cash and $1.3 billion in AGU common units. After the deal, Energy Transfer Partners will own 34% of AmeriGas common units and has agreed to hold onto its stake in AmeriGas until 2013. According to Roger Conrad of Personal Finance:
The deal completes Energy Transfer Partners’ transition to a pure midstream energy company. It will provide badly needed cash to finance the company’s pending $2 billion purchase of Florida Gas Transmission. The need to come up with $3 billion to $3.5 billion in equity to finance that deal — as well as the MLP’s growth in natural gas liquids infrastructure — has hung over its unit price for some months.
This deal dramatically reduces financing/distribution risks, and Energy Transfer will still realize a healthy chunk of cash from propane by owning 34 percent of AmeriGas. Moody’s has already called the propane operations sale positive for credit.
3. Statoil ASA (NYSE: STO) Buys Brigham Exploration (NasdaqGS: BEXP)
Norway’s government-controlled oil company is buying the Bakken-shale-centered natural gas exploration and production (E&P) company for $36.50 per share in cash. Statoil needs to replace its North Sea oil production, which has declined by 50% since 2000. Breakeven price of production in the North Dakota gas fields is $55 per barrel of oil equivalent, which is far below West Texas Intermediate (WTI) crude oil’s current price of $86 per barrel or Brent North Sea crude oil’s $111 per barrel price tag.
According to lead advisor Elliott Gue of Personal Finance:
Statoil’s interest in the red-hot Bakken Shale suggests that other Super Majors may be eyeing similar deals.
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