What happened

Shares of SemGroup (NYSE:SEMG) had rocketed 64% by 11:00 a.m. EDT on Monday. Fueling the energy company's surge was its acceptance of a buyout offer from midstream giant Energy Transfer (NYSE:ET).

So what

Energy Transfer has agreed to pay $17 per share in a cash-and-stock deal for SemGroup, which is 65% above its closing price last Friday. The transaction values the midstream company at $5 billion, including the assumption of debt.

Two people shaking hands with pipelines in the background.

Image source: Getty Images.

While Energy Transfer is paying a hefty premium for SemGroup, it's getting a pretty good price for the company's oil-focused infrastructure. After taking into account the $170 million of annual cost savings it expects, Energy Transfer is paying only nine times SemGroup's 2019 EBITDA. For comparison's sake, most midstream acquisitions typically cost 12 to 14 times EBITDA. It's getting such an attractive price because of the substantial decline in SemGroup's stock in recent years. Even with today's surge, shares are down 20% in the past year and 50% over the last three.

Because Energy Transfer is getting SemGroup for a compelling value, the deal will be immediately accretive to its distributable cash flow per unit. Further, even with the cash it's paying and the assumed debt, the deal won't have a material impact on Energy Transfer's credit metrics.

Aside from the financial benefits, the deal makes lots of strategic sense for Energy Transfer. It will bolster the company's oil and natural gas liquids (NGLs) infrastructure. It will also give it a second world-class export terminal along the U.S. Gulf Coast. Finally, it will enhance Energy Transfer's growth prospects. Energy Transfer has already announced the construction of a new oil pipeline that will connect the two oil export terminals.

Now what

Energy Transfer is bulking up its oil infrastructure business by acquiring SemGroup. The deal will immediately enhance the company's asset base, increase its cash flow, and bolster its growth prospects. Add to all that the compelling valuation, and the midstream giant seems to be making an excellent acquisition both strategically and financially.