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The Deal: Regency Energy Pays Premium for PVR

Stocks in this article: PVRRGP

NEW YORK ( TheStreet) -- Houston energy midstream services provider Regency Energy Partners (RGP)said Thursday it agreed to buy PVR Partners (PVR)of Radnor, Pa., for $5.6 billion, expanding it from the Permian Basin, South Texas and northern Louisiana into Appalachia's Marcellus and Utica shale plays and the Mid-Continent. The deal includes $1.8 billion in debt assumption.

PVR was surging on the news, gaining 12% to $25.65, while Regency was losing 8% to $25.61.

Holders of PVR common units, Class B units and special units will receive 1.020 common units of Regency for each PVR unit they hold and a one-time cash payment at closing estimated at $40 million. Together, the stocks and cash were valued at $28.68 per unit, a 25.7% premium over PVR's closing price Wednesday of $22.81.

Both partnerships' boards have approved the deal. The transaction is expected to close in the first quarter of 2014 if it clears PVR unitholders and Hart-Scott-Rodino.

CreditSights Inc. analysts Andy DeVries and Charles Johnston wrote in a report Thursday that Regency is paying a full multiple for PVR at 19.5 times Ebitda for the last 12 months, 17 times this year's estimated Ebitda and 14 times next year's Ebitda, versus the bidding war for Southern Union Co. that went over 10 times Ebitda ("and everybody thought that was expensive," they wrote). "While the 14 times is high relative to historic norms, that is being driven by the Fed and investors chasing yield in MLP's," they said, noting that 14 times is in line with current merged GP/LP MLP valuations like MarkWest Energy Partners LP (13.9 times) and Enterprise Products Partners LP (14.2 times).

CreditSights said it was surprised by the deal, as it expected Regency would instead get merged into Energy Transfer Partners LP. It was also surprised that Regency used equity to fund the deal, as Regency yields 6.7% while Sunoco Logistics Partners LP, also owned by Energy Transfer, yields only 3.7% and thus is a much more richly valued currency for making acquisitions.

"We understand PVR is in a different business line than SXL [Sunoco] but we assumed SXL could find its own acquisitions," it wrote.

CreditSights is also concerned about Regency picking up PVR's coal royalty business, which makes up 20% of its earnings. "While less than 10% of the combined company's Ebitda, coal is clearly a negative for MLP [master limited partnership] investors," it said. "We assume the negative of the coal business is offset by O&M [operations and maintenance] synergies."

PVR also merged with its general partner in 2011 so there are no incentive distribution rights impacting financials, CreditSights noted.The two companies claimed that the deal will create a leading gas gathering and processing platform with a scaled presence across North America's premier high-growth unconventional oil and gas plays in Appalachia, West Texas, South Texas, the Mid-Continent and northern Louisiana.

The combination will be slightly dilutive to next year's discounted cash flow. However, the partnerships said it's not expected to affect anticipated cash distribution growth next year, and the enhanced scale, balance sheet strength and diversification are expected to provide substantial Ebitda and discounted cash flow growth over time.

Moreover, the deal is expected to better-position the combined company to capitalize on the long-term growth momentum of North American gas production through incremental, high-value expansions around its core asset base and other growth and acquisition opportunities.

"This acquisition enhances our overall geographic diversity by providing Regency with a strategic presence in two prolific producing areas, the Marcellus and Utica shales in the Appalachian Basin and the Granite Wash in the Mid-Continent region," Regency CEO Michael Bradley said in a statement. "These are tremendously complementary businesses, and as a result, we expect the increased footprint and scale to create significant synergies and provide substantial organic growth opportunities that will continue to support our goal of increasing distributions and creating unitholder value."

PVR chief executive William Shea Jr. said in a statement the merger creates a larger, more diversified operating platform that will be highly attractive to investors, customers, creditors and employees.

"We believe that the size and scope of the combined enterprise will be highly beneficial to our unitholders, offering added diversification and critical mass which will provide the needed financial flexibility to fully execute and benefit from the significant portfolio of organic growth projects we have developed over the past three years, especially in our Eastern midstream operations."

Bradley will continue as president and CEO, and Thomas Long will continue as CFO. Regency and PVR expect to establish a transition team made up of members of both management teams to prepare for and to oversee the integration.

The partnerships said the combination will have assets in many of the most economic, high-growth unconventional oil and gas plays in North America: the Wolfcamp, Bone Springs, Avalon and Cline shale plays in the Permian, the Eagle Ford shale play in South Texas, the Marcellus and Utica shale plays in Appalachia, the Granite Wash play in Oklahoma and Texas and the Haynesville Shale and Cotton Valley formation in North Louisiana. The increased scale and footprint will position Regency to build deeper customer relationships and secure and execute additional accretive growth opportunities, the partnerships said.

Regency used Bank of America Merrill Lynch's Michael Cannon and Andrew Castaldo, UBS Investment Bank's Rob Pierce and Carlos Rivero and a Baker Botts LLP team including Neel Lemon, Breen Haire, Joshua Davidson, Steve Marcus, A.J. Ericksen, Daniel Gottschalk, Rob Fowler, Paul Cuomo, Scott Janoe, Doug Rayburn and Luke Weedon.

PVR tapped Citigroup Global Markets Inc.'s Claudio Sauer and Drew Horn; Evercore Partners' Ray Strong, Rob Pacha, Eric Bauer, Amit Bushan and Joyce Zhang; and Vinson & Elkins LLP's Mike Rosenwasser and Michael Swidler.

--By Claire Poole in Houston

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