Pipeline giant ONEOK (OKE 0.83%) is making a big splash. It's acquiring master limited partnership (MLP) Magellan Midstream Partners (MMP +0.00%) in an $18.8 billion deal. While the combination isn't a perfect strategic fit, it will significantly enhance the combined company's earnings, primarily driven by tax savings. Because of that, it will improve ONEOK's ability to maintain and grow its 6.5%-yielding payout.
The transaction could be a catalyst (and blueprint) for more consolidation in the midstream sector, which is known for paying high-yielding dividends. Here's a closer look at the deal and some companies that might benefit from a similar combination.
NYSE: OKE
Key Data Points
A tax-driven transaction
ONEOK is acquiring Magellan in a cash-and-stock deal. The pipeline stock is paying 0.667 shares and $25 in cash for each of the MLP's common units. That implies a hefty 22% premium to the MLP's closing price before the deal's announcement.
Even with that large premium, ONEOK expects the deal will be highly accretive. It foresees a modest earnings-per-share boost next year. Meanwhile, it sees earnings-per-share accretion of 3% to 7% annually from 2025 to 2027. In addition, the company expects the merger will increase its free-cash-flow per share by 20% annually from 2024 to 2027.
ONEOK anticipates capturing at least $200 million of annual synergies with the potential to extract over $400 million in the future. In addition, the company expects that the acquisition will allow it to defer paying the new corporate minimum tax from 2024 to 2027. These benefits make the transaction very attractive financially.
Those financial benefits help offset the somewhat uneven strategic fit. While both companies primarily focus on liquids, ONEOK concentrates on natural gas liquids (NGLs), and Magellan Midstream Partners focuses on refined petroleum products. Because of that, the potential commercial synergies aren't as meaningful as they would have been if ONEOK had acquired a company in a more adjacent space.
NYSE: MMP
Key Data Points
The M&A wave is growing
The $18.8 billion merger deal is the largest in the midstream sector this year. It continues what has been a fairly active period. Notable deals included:
- Refining giant Phillips 66 (PSX +1.93%) agreed to acquire all the units of MLP DCP Midstream (DCP +0.00%) that it didn't already own for $3.8 billion in cash. The highly strategic deal will supply Phillips 66 with at least $300 million of deal synergies.
- MLP Energy Transfer (ET 1.24%) acquired Lotus Midstream from a private equity company for $1.45 billion in cash and units. The company expects the deal will be accretive to its distributable and free cash flow.
Meanwhile, several midstream companies made acquisitions and asset purchases last year. For example, Targa Resources acquired Lucid Energy Group for $3.6 billion; Enterprise Products Partners bought Navitas Midstream for $3.3 billion; and Pembina Pipeline teamed up with KKR to acquire Energy Transfer Canada for $1.3 billion. In addition, several midstream companies made smaller asset acquisitions. These deals have enabled the acquirers to grow their cash flows, allowing many to increase their already high-yielding payouts.
NYSE: ET
Key Data Points
From strategic to financial
Recent midstream deals have focused on companies enhancing their strategic footprints by acquiring assets that fit well within their existing footprint. For example, Phillips 66 already owned a stake in DCP Midstream because it aligned with the company's NGL strategy. Meanwhile, Energy Transfer's acquisition of Lotus Midstream will enhance connectivity in the Permian Basin.
However, the ONEOK deal was more of a financial transaction with a loose strategic fit. The company is making a highly accretive deal, driven largely by tax benefits, not commercial synergies. The different tax structures are a big driver of those financial benefits, as ONEOK is a C-corp, while Magellan is an MLP. The company expects to benefit from a step-up in Magellan's tax basis, which will defer the expected impact of the new corporate minimum tax for the next several years.
That benefit might lead other pipeline companies to seek to acquire MLPs to reap the same tax benefits. For example, Enbridge (ENB 0.78%) expects modest headwinds from tax legislation to slow its distributable cash-flow growth rate to about 3% annually through 2025, limiting dividend growth in the near term. Because of that, it might benefit from an acquisition that could help offset those near-term tax headwinds. Meanwhile, several other large pipeline corporations like Kinder Morgan and Williams could find an acquisition that saves them lots of money on taxes. Likewise, refining companies like Marathon Petroleum and Delek US Holdings might calculate that acquiring their MLPs -- MPLX and Delek Logistics Partners, respectively -- will provide significant tax savings.
More consolidation is likely coming to the midstream sector
Consolidation has been an ongoing trend in the midstream space, which seems likely to continue. Many midstream companies have been focusing on expanding their strategic footprints by acquiring smaller players in the industry that complement their existing portfolio.
However, ONEOK's deal for Magellan shows a potential new path for consolidation aimed at deferring taxes. It could pave the way for similar transactions enabling midstream companies to generate more cash in the near term to pay dividends. It's an interesting potential catalyst for income-focused investors to watch this year.
