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New Deals Try to Stop the Spin

Update with SemGroup Press Release in seventh paragraph

NEW YORK ( TheStreet) - In reviving its $1 billion bid for SemGroup (SEMG - Get Report), Plains All American Pipeline (PAA - Get Report) is continuing to say to SemGroup shareholders that management's strategy is all wrong.

That seems to be the theme in deal circles of late: Plain-old company takeovers may be an alternative to management spin-offs or growth strategies that are currently the rage.

The hostile bid to shareholders is a culmination of almost two years of Plains' conflict with SemGroup managements' recovery strategy, which is seeking to put a 2009 bankruptcy and resulting civil litigation with the Securities and Exchanges Commission behind it. In March 2010, Plains offered to buy the Tulsa, Oklahoma -based oil & gas pipeline, terminal and storage company founded in 2000 out of bankruptcy for $17 a share - an offer that was rejected by SemGroup's board. The company instead went public in November 2010 at a price of over $24 a share on the first day of trading.

This summer, amid a wave of spinoff and IPO plans, SemGroup decided to spin its Rose Rock Midsteam business into a separate publicly traded company and to contribute its SemStream business to NGL Energy (NGL - Get Report). In August, SemGroup announced it would raise $181 million by doing a public offering for Rose Rock Midstream -- previously the SemCrude oil & gas storage and pipeline division of the company that holds a crude storage facility at the delivery point for West Texas Intermediate in Cushing, Oklahoma. Management said that the proceeds of the IPO would be used to pay down the company's $343 million in debt.

At the end of August, SemGroup then also announced a spin of its SemStream businesses to NGL Energy, raising $100 million in cash, as well as $179 million in common stock of NGL Energy and a continued 7.5% interest in NGL Energy.

Today's letter to shareholders is a continued rebuff to SemGroup's post-bankruptcy strategy that has catapulted the stock to levels above when any spin plans were announced. For other company's like Yahoo! (YHOO - Get Report) that may be considering a spin, a plain buyout may be a better alternative.

Plains released its letter to shareholders Monday after its takeover offer made to SemGroup's board on Oct. 6th was rejected on Oct. 19. SemGroup released a separate press release on Monday outlining its board's decision to reject Plains' bid. "Board and management team are enthusiastic about the Company's prospects and are confident of achieving stockholder returns in excess of what can be derived from Plains All American's unsolicited proposal," SemGroup said.

In its letter to SemGroup, Plains' chief Executive Greg L. Armstrong said, "We believe that the attractive and certain value we are proposing to deliver to SemGroup's stockholders is greater than any value that might be created on a reasonable timetable from any of SemGroup's other strategic alternatives, including the value attributable to a successful completion of SemGroup's proposed initial public offering of its newly-formed master limited partnership, Rose Rock Midstream, L.P., and its announced transaction with NGL Energy Partners, the expected value of which are already reflected in SemGroup's stock price."

In their bid, Plains is showing that outside of spin plans, the planned 'synergies' in business achieved through takeovers can actually lead to an increased company value - or price paid. "PAA is uniquely positioned to realize significant costs savings and synergies, which are reflected in our proposal and thus would be shared with your stockholders," said Armstrong in his letter to SemGroup. In their bid, Plains is valuing SemGroup at $1.24 billion, above its current market cap of $1.14 billion.

SemGroup's stock, which traded above the hostile bid price in early trading Monday, was previously down more than 10% year to date and well below its post-IPO high of $34.28 a share reached in March. The company's struggled to be profitable since its IPO, reporting a net loss of $132 million in 2010, and a net profit of just $30,000 in the first quarter of 2011.

Last week, Kinder Morgan (KMI - Get Report) said it would buy El Paso (EP) for $21.1 billion and in August, Southern Union (SUG) accepted a $5.5 billion takeover by Energy Transfer (ETE). El Paso's takeover also undid a previously announced spin of its oil & gas exploration and production business -- some shareholders have filed a lawsuit regarding the change in strategy. Both deals were announced at over 40% premiums to market prices prior to bids being made public.

It's a signal that other companies considering strategic reviews may be better served finding a strategic bidder for their entire operations if synergies exist, instead of spin off strategies that intend to capture higher values for the pieces of a company. It's also another signal that within the energy space, not all spins are the same.

In its letter, Plains wrote, "Our proposal provides all of your stockholders an opportunity for liquidity at an attractive and certain value that mitigates the timing, market and execution risks associated with any alternative value creation transactions." While that may be the case, SemGroup's management has so far been able to draw out a 41% increase in Plain's bid through its obstinacy. Today's trading shows that investors are expecting more to come.

-- Written by Antoine Gara in New York

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