What: Units of Markwest Energy Partners LP (NYSE: MWE) surged on Monday after the company announced a strategic combination with MPLX LP (NYSE:MPLX). Under the terms of the agreement MPLX will acquire Markwest Energy Partners in a unit-for-unit exchange, plus a one-time cash payment, and the assumption of debt implying a $20 billion value for Markwest. It's a combination that will create the fourth-largest MLP.
So what: This is a very ambitious transaction given the fact that MPLX is a much, much smaller entity. Its market cap its less than $5 billion (and heading even lower as its units are down more than 16% on the deal announcement) while Markwest Energy Partners' market cap implied in that deal is $15.8 billion. It's that size differential that's likely playing a role in suppressing some of the deal value as MLPX actually offered to buy Markwest at a 32% premium to its closing price on Friday. With the units only opening up 10% higher (and MPLX's down 16%) it suggests that investors are worried that MPLX is biting off more than it can chew.
All that being said, it's a combination that does make strategic sense as it creates a much larger, more diversified entity. It combines Markwest's strengths in natural gas processing with MPLX's crude oil and refined petroleum product's asset base. Further, the deal will really drive strong growth for the newly combined entity as MPLX expects to grow its distribution 29% this year, 25% per year through 2017, and deliver peer-leading growth thereafter.
Now what: The strategic rationale aside, investors seem concerned that this deal might not be the best one for either company to be making right now. These concerns include the fact that MPLX is acquiring a much larger entity and it is diversifying into a sector that's not its core competency while Markwest might have been a better fit for an even larger more deep-pocketed peer. That said, MPLX is also stepping up with an ambitious deal to acquire a company that has a really robust growth profile in the Marcellus and Utica shale plays. It's a deal that's expected to fuel top-tier growth for years to come and therefore could really pay off for investors over the long-term.