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Why ETP and SXL Fell on Deal Announcement

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Market reaction to the ETP-SXL merger

The market reacted negatively to Energy Transfer Partners’ (ETP) and Sunoco Logistics Partners’ (SXL) merger announcement. ETP and SXL fell 7.2% and 6.6%, respectively, following the deal announcement. At the same time, Energy Transfer Equity (ETE) rose 3.6%.

ETP’s shareholders seemed unhappy with the implied deal price of $39.3 per unit, which is below ETP’s closing price before the merger announcement and its 52-week high of $43.5. Moreover, the merger consideration is way below the target price set by Wall Street analysts prior to the transaction. However, a lower deal price might be compensated by a better distribution growth profile and a strong coverage ratio for ETP’s unitholders.

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According to the merger presentation, the merger is “Expected to allow the combined partnership to be in position to achieve near-term distribution increases in the low double digits and a more than 1.0x distribution coverage ratio.” Moreover, distribution yield for the combined partnership is expected to be higher compared to the distribution yield enjoyed by existing ETP’s shareholders while the overall risk profile might remain same or improve slightly.

Sunoco Logistics’ shareholders might be concerned with the addition of highly leveraged and low growing MLPs to their portfolio. On the other hand, the merger expands SXL’s basin exposure and offers several liquids integration opportunities. ETE’s stock price gain could be attributed to its simplified organizational structure following the merger completion, while the transaction is not expected to have a major impact on its distribution income.

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