For NGLS investors
On November 3, 2015, Targa Resources (TRGP) and Targa Resources Partners (NGLS) announced that Targa Resources plans to acquire Targa Resources Partners in an all-stock deal. NGLS shareholders will receive 0.62 shares of Targa Resources for every NGLS share. This implies an 18% premium to NGLS’s ten-trading-day volume weighted average closing price. This is also an 18% premium over NGLS’s November 2, 2015, closing price.
The transaction is expected to close in the first quarter of 2016. The total deal is valued at ~$6.7 billion. The transaction eliminates incentive distribution rights, which is expected to improve the cost of capital and simplify capital structure, similar to the Kinder Morgan (KMI) consolidation. It’s an all-equity transaction requiring no additional financing.
Market reaction to the NGLS-TRGP deal
NGLS shares closed 0.6% lower on the day of the announcement compared to the previous close. TRGP, on the other hand, fell 12.6% compared to its previous close. According to the announcement, the deal is immediately accretive to TRGP shareholders, which means it’s expected to increase TRGP’s earnings per share.
The fall in TRGP stock possibly reflects investors’ concerns over losing IDR (incentive distribution right) payments from NGLS. NGLS had announced flat 3Q15 distributions and had a flat distribution outlook prior to the announcement of the deal, indicating constrained growth prospects. This may also have contributed to the fall in the price of TRGP stock after the merger announcement.
The above graph shows the year-to-date returns for NGLS, TRGP, ONEOK Partners (OKS), DCP Midstream Partners (DPM), and the Alerian MLP ETF (AMLP). The challenging commodity price environment has resulted in some consolidation in the energy sector. You can read about the Energy Transfer Equity (ETE)–Williams Companies (WMB) merger in A Complete Guide to the Energy Transfer–Williams Merger.
In this series, we’ll look at the rationale behind the Targa Resources Partners–TRGP deal, the terms of the transaction, expected synergies, future outlook, and analysts’ recommendations for the two companies.