NEW YORK ( TheDeal) -- In a surprise announcement, Findlay, Ohio refiner Marathon Petroleum (MPC) - Get Report said Monday its master limited partnership MPLX LP (MPLX) - Get Report agreed to buy MarkWest Energy Partners (MWE) for $20 billion, expanding its reach into the processing business in the northeast.

The price includes 1.09 of an MPLX unit and $3.37 in cash for each MarkWest unit valued together at $78.64 per unit, a 32% premium over MarkWest's closing price Friday of $59.75. MPLX is paying MarkWest shareholders a onetime cash payment of $675 million and assuming $4.2 billion in MarkWest debt.

MarkWest's units were up 10.5% on the news to $66.04 in trading Monday morning, while MPLX's units were down 15.4%, to $58.39. Marathon Petroleum's stock was up 9%, to $59.45.

Management from both companies said on a conference call Monday morning that they have been discussing possible partnerships for over a year, and that the conversations evolved early in the spring into combination talks. They also confirmed the deal comes with a $625 million breakup fee.

Kinder Morgan (KMI) - Get Report had been rumored to be interested in acquiring MarkWest, but because Kinder Morgan is a corporation rather than a master limited partnership, there would have been negative tax consequences from such a deal.

Denver-based MarkWest owns and operates midstream service businesses in several natural gas liquids-rich resource plays in the U.S., is the U.S.' second largest processor of natural gas and is the largest processor and fractionator in the Marcellus and Utica shale regions, while MPLX own crude oil and refined products logistics assets. The combination would create the fourth-largest master limited partnership based on a market capitalization of $21 billion.

Analysts at Tudor, Pickering, Holt & Co. Securities said they had expected refining-sponsored limited partnerships to be active in M&A but on a smaller scale and focused on crude logistics. "Rather than integrating similar asset bases, [the] merger creates [a] diversified MLP," they said. "MWE's attractive growth backlog now likely accesses MPLX's lower cost capital."

They added that if the deal goes through, it would take the most prominent alternative target off the table for Energy Transfer Equity (ETE) proposed purchase of Williams (WMB) - Get Report and emphasizes the industry's interest in a Northeast asset base as management teams look to secure exposure to growth basins.

Global Hunter Securities analyst Sunil Sibal said he estimates that MPLX is paying 21 times this year's Ebitda and 17 times next year's Ebitda for MarkWest. He added that with some headwinds from weak natural gas liquids pricing in the Northeast and also potential competition from a formidable competitor if the Williams-Energy Transfer merger goes through, "MWE management has taken a proactive step to ward off competition."

Global Hunter mentioned MarkWest as a potential takeover target in December of last year, along with Targa Resources Partners (NGLS) / Targa Resources (TRGP) - Get Report, given the rather quick drop in commodity and unit prices for master limited partnerships.

Simmons & Co. International analyst Jeff Dietert said the industry appears to be moving on to the next stage of their growth plan involving sizable third party acquisitions, versus an emphasis on MLP-qualified Ebitda previously, citing Tesoro Logistics (TLLP) $2.5 billion acquisition of QEP Field Services late last year as another example.

Marathon CEO and president Gary Heminger said in a statement that the combination goes a long way to execute the company's strategy to expand its midstream business. "This transaction creates a tremendous platform for the combined partnership to continue to grow distributable cash flow and creates significant long-term value for the unitholders," he said.

Heminger added that MPLX is expected to have 29% distribution growth this year and that the combined entity should have a 25% compound annual distribution growth rate through 2017. "MPC's strong balance sheet and liquidity will enable MarkWest to accelerate organic growth in some of the nation's most economic and prolific liquids-rich natural gas resource plays," he said. "We expect the combination of these projects and MPC's MLP-eligible midstream assets to support a strong distribution growth profile over an extended period of time for MPLX."

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