What happened

Shares of Tallgrass Energy (NYSE:TGE) jumped more than 13% by 2:15 p.m. EST on Wednesday after a report by Bloomberg that an investor group was thinking about acquiring the midstream company.

So what

According to Bloomberg, an investor group led by Stonepeak Infrastructure Partners has held talks to potentially acquire Tallgrass Energy Partners. The report stated that the prospective buyers haven't reached a deal and that the negotiations may fall apart.

A twist of pipelines with a bright sun shining through.

Image source: Getty Images.

Tallgrass Energy operates a diversified portfolio of midstream assets, including a majority stake in the Rockies Express Pipeline, which moves gas across the country from the Rockies to Appalachia. Long-term contracts support the bulk of the company's cash flow, with more than 98% of its earnings coming from fee-based sources. Meanwhile, the company has significant expansion potential, since it's currently pursuing a long-haul pipeline and export terminal project that would move oil from Oklahoma to the coast of Louisiana, where it could reach global export markets.

Stonepeak Infrastructure Partners, meanwhile, is a private equity firm focused on investing in infrastructure assets in North America. Among Stonepeak's investments is a joint venture with midstream company Targa Resources (NYSE:TRGP) to develop some of its expansion projects. Stonepeak is investing up to $960 million into this development joint venture with Targa Resources that will own Targa's 25% interest in the Gulf Coast Express Pipeline, a 20% stake in its Grand Prix Pipeline, and 100% of the company's next fractionation unit, which will separate raw natural gas liquids into higher-value products like ethane and propane. These investments enabled Targa Resources to finance some of its expansion projects at an attractive cost while giving Stonepeak the opportunity to earn solid returns on its investments.

Now what

Given Tallgrass Energy's cash flow profile and growth prospects, it would be an attractive acquisition for a private equity fund to consider, especially since its valuation is relatively inexpensive at less than 10 times cash flow. However, there's no guarantee that these talks will lead to an acquisition at an attractive premium. That's why investors shouldn't buy on the hope of making a quick profit on a potential buyout.