An important deal
On March 28, 2014, Energy Transfer Partners LP (ETP) announced that it entered into a definitive merger agreement to acquire 100% of Susser Holdings Corporation (SUSS), a total consideration of approximately $1.8 billion. Susser Petroleum Partners LP (SUSP) is a subsidiary of Susser Holdings Corporation. Following the news of the proposed transaction, SUSP’s share price spiked 22%. ETP, in contrast, had a muted response, with its share price falling marginally by 1% on the day of the announcement.
The anticipated drop-downs of the existing Sunoco and Susser retail businesses into SUSP would enable ETP to segregate the retail business into a dedicated entity. It will have its own independent access to capital to support its growth strategy. The expected drop-downs would generate significant cash proceeds to ETP over the next several years. Eventually, ETP plans to fully exit the retail business through a combination of transactions—an exchange of SUSP GP/IDRs held by ETP for ETP common units held by ETE, and finally monetization of SUSP units.
Jamie Welch, group CFO of ETE, said during the conference on the merger agreement, “I think in last part, when you look at the fact that the IDR – there is in fact no IDR cash flow today coming up from SUSP. And ETP owns a very large retail business in Sunoco. How do you harvest that business and benefit from the fact of your own efforts? So, the best way to do it is for ETP to acquire – to look at it this way; to acquire Susser, to in fact give the dropdown, grow the IDR cash flow, because the IDRs have now been separated out directly under ETP, create a significant amount of value, and then recycle a lot of that upfront capital they get from – that they put out to buy Susser in the first place and get it back from ETE in the form of their own units. So, it’s the best of all worlds there. In essence, they’re just – they’re spending money today and within an expected 12, 18-month period, they’ll get a lot of it back.”
SUSS has consistently earned higher revenues in the past five years, coupled with improving cash flow from operations.
Susser currently has 5.3% distribution yield and a 1.2 times distributable cash flow coverage ratio. In comparison, ETP currently has distribution yield of 6.6%. This provides an attractive cost of capital to ETP to continue to grow its retail business. This is because the combined entity will benefit from Susser’s lower yield. Generally, when the cost of equity capital increases, it’s negative in the sense that it’s more expensive for MLPs to fund growth and makes fewer growth projects and acquisitions attractive. The operating cash flow is expected to increase for the new unit as the overall action plan is executed, primarily because of Susser’s rapidly improving operating cash flows. In the past five years, cash flows from operation in Susser increased by a compounded annual growth rate (or CAGR) of 42.7%. As of December 31, 2013, Susser had $148.3 million of marketable securities as assets and $186.2 million of debt.
Energy Transfer Partners LP (ETP) and Susser Petroleum Partners LP (SUSP) are master limited partnerships operating in the midstream energy space in the wholesale and retail businesses. Other major companies operating in the same sector include Ferrellgas Partners LP (FGP) and Kinder Morgan Partners LP (KMP), which are also components of the Alerian MLP ETF (AMLP), Global X Funds MLP ETF (MLPA), or Yorkville High Income MLP ETF (YMLP).