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Magellan Midstream Partners to be Acquired by ONEOK. What I'm doing with my shares.
Welcome to The Growth Curve. My last deep dive was “CNX Resources: The Most Aggressive Buyback Plan I Have Ever Seen”. My next deep dive will be on Perimeter Solutions (PRM), a $1B company that provides fire safety equipment and oil additives. Here is a link to the Growth Curve portfolio.
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MMP 0.00%↑ is currently a 5.7% position in the portfolio with a cost basis of $54.13. The company has an annual dividend payout of $4.19 which is a dividend yield of 6.69%.
On Monday, May 15, 2023, ONEOK announced their plan to acquire Magellan for a mix of 63% OKE stock and 37% cash. The total “consideration” for each Magellan unit was $67.50 based on $25 in cash and 0.6670 shares of OKE common stock which were priced at $63.72 when the offer was made.
MMP ended Monday trading at $62.61, up 13% which is clearly lower than the $67.50 consideration cited above.
So why aren’t MMP shares trading at $67.50?
OKE shares traded down 9% to $57.95. So if we take the 0.6670 shares of OKE that is being issued for each unit of MMP , and multiply it by yesterday’s OKE closing price of $57.95, we get $38.65. Then we add the $25 in cash being paid for each MMP unit and we get a total value of $63.65 which is just above yesterday’s MMP closing price of $62.61. So the price of MMP shares will be correlated with the movement in OKE stock from now until the deal closes
It’s pretty common for shares of a company being acquired to trade below their acquisition price because there’s a chance deals don’t get approved by regulators.
What I’m doing with my MMP shares.
Nothing. I’m going to keep holding them. I invested in MMP because I believe their ability to transport, store and distribute petroleum products will be a key part of U.S. energy infrastructure in the future, they have increased their dividend for 21 straight years, and the stock has significantly outperformed the S&P 500 from a price and total return perspective (includes dividends) since 2001.
None of that changes with this acquisition, and I believe the combination of OKE and MMP will lead to some benefits due to scale in the future.
Since ONEOK is acquiring MMP, I think it’s also important to consider their track record. OKE has also significantly outperformed the S&P 500. They’ve paid an uninterrupted dividend for 34 years.
Past performance is not a guarantee of future results, but when I see a company that has outperformed over a 20+ year time period and paid a dividend for 30+ years straight, that at least indicates that the business is somewhat durable.
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Management highlighted what they believe to be the benefits of a diversified product mix on the slide below and expect the acquisition to provide and additional 3% - 7% EPS growth from 2025 - 2027 and average annual free cash flow per share growth of 20%.
So that’s really it for me. Nothing changes about my thesis of wanting to own this cash-flowing business that is a critical component of the U.S. energy infrastructure and has a long track record of strong performance.
If anything, I believe the combined companies will be stronger and more durable.
If you’d like to learn more about the deal, I encourage you to review the full presentation or watch the merger webinar at this link.
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Let me know what you think of the acquisition in the comments and if you’re a shareholder or plan to invest in MMP or OKE.