(Bloomberg) — Oneok Inc. agreed to buy Magellan Midstream Partners LP in a $18.8 billion cash-and-stock transaction that would create one of the largest US oil and natural gas pipeline operators.
The deal will see each Magellan stakeholder receive $25 in cash and 0.667 shares of Oneok stock per unit, representing a 22% premium to closing prices on May 12, the companies said in a joint statement on Sunday. The transaction includes $8.8 billion in new equity and the assumption of $5 billion of existing net debt.
Pipeline operators are increasingly turning to acquisitions for growth as the transition to renewable energy pares the need for new links and threatens to make some existing assets redundant. The acquisition will give Oneok, which currently transports only natural gas and its byproducts, access to a network of crude oil and refined-products conduits and terminals sprawling from Texas to Minnesota.
The combined company will have a total enterprise value of $60 billion, according to the statement. That would put it among the five largest US pipeline operators by that criteria, according to data compiled by Bloomberg.
“We see this as a bold move to redirect the long-term strategy of both companies, propelling the pro forma entity closer to the top of the class from a scale and diversification perspective,” Raymond James Financial Inc. analysts J.R. Weston and Justin Jenkins wrote in a note to clients. While the “surprising deal” comes at a high price for Oneok, it could still make sense, they added. “We are fans of consolidation in midstream.”
Oneok shares fell 5.6% as of 8:33 a.m. in pre-market trading in New York. Magellan units surged more than 15%.
For Magellan, the deal represents an opportunity to exit the so-called master limited partnership structure at a higher premium than some peers in recent transactions, according to Timm Schneider, an analyst who runs The Schneider Capital Group. MLPs have generally fallen out of the favor among investors since the crude-market crash of 2014-2016 and a change in US tax policy.
The transaction is expected to close during the third quarter, subject to shareholder and regulatory approvals. Oneok has secured $5.25 billion in fully committed bridge financing for the cash portion of the deal.
Oneok expects the transaction to have a positive impact on both per-share earnings and free cash flow. Both companies are based in Tulsa, Oklahoma.
