EPD and EPE Wrap up Merger - Analyst Blog

One of the nation's biggest pipeline operators, Enterprise Products Partners L.P. (EPD) and Enterprise GP Holdings LP (“EPE”) have completed a unit-based merger. Enterprise GP is now a subsidiary of Enterprise Products.

Per the agreement, for every 1 unit, EPE unitholders will receive 1.5 units of Enterprise Products. EPE unitholders will get cash in accordance with the merger agreement in lieu of any fractional units they otherwise would have been entitled to receive. EPE has ceased trading at the close of business on November 22, 2010. The common units Enterprise Products continues to trade on the New York Stock Exchange under the ticker "EPD".

Importantly, EPE's 2% economic general partner interest, general partner incentive distribution rights (IDRs), and 21.6 million EPD common units currently owned by EPE will be eliminated. The cancellation of IDRs implies there would be more cash available to distribute among unitholders.

This consolidation seems to be the largest merger and acquisition deal experienced within the master limited partnership (MLP) asset class. Although the EPE–EPD merger will be modestly dilutive in the near term, it would make Houston-based Enterprise Products Partners more competitive by reducing the partnership's cost to raise money as well as simplify its corporate structure.

Given EPD's diverse footprint and vertically integrated asset base, investment-grade balance sheet with fee-based development projects, strong organic growth projects and integrating acquisitions, along with an innovative and entrepreneurial management team, we believe it is well positioned to generate higher returns on invested capital over the long term. EPD is also actively expanding its midstream platform in the Eagle Ford with customers such as EOG Resources Inc. (EOG), Anadarko Petroleum Corporation (APC), and Pioneer Natural Resources Co. (PXD).

However, all these positives are already reflected in its current valuation, leaving little room for further upside. Moreover, volume risk and areas of commodity price exposure can hurt near-term results.

We are reiterating our long-term Neutral rating on Enterprise Products Partners. The company also has a Zacks #3 Rank (short-term Hold recommendation).

 
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