Units of AmeriGas Partners (NYSE:APU) had surged more than 12% by 10:15 a.m. EDT on Tuesday after the propane-distributing MLP's parent, UGI (NYSE:UGI), agreed to acquire the company's units that it didn't already own in a cash-and-stock deal.
UGI has offered to purchase the 74% of AmeriGas Partners that it doesn't currently own for $2.44 billion. Unitholders of AmeriGas Partners would receive 0.50 shares of UGI and $7.63 in cash for each unit they own, which is a 13.5% premium to Monday's closing price.
The transaction will enable UGI to consolidate its ownership of AmeriGas Partners. It will also increase its cash flow per share by 15% for fiscal 2020 by providing the company with more than $200 million in additional annual cash flow. That will enable the company to invest in other growth projects while supporting a 25% dividend increase. Meanwhile the combined company estimates that it can grow earnings per share by 6% to 10% each year while increasing the dividend at a 4% annual pace, which will enhance its long-term sustainability since the payout percentage will steadily decline as earnings increase faster.
UGI is the latest energy company to acquire its affiliated MLP. The sector has moved away from using MLPs to help fund growth due to higher costs as investors, because of rising interest rates and risk profiles, have lost their enthusiasm for these high-yielding entities. By acquiring the rest of AmeriGas Partners, UGI will be able to retain more cash and cut costs, which will improve its financial profile over the long run.