In my opinion, the synergies outweigh what I think of Crosstex. The two companies, from what I have read, have been business partners for a long time.
“This deal is like marrying your high school sweetheart,” Ethan Bellamy, a Denver-based analyst for R.W. Baird & Co., wrote in an e-mail. “Crosstex provided excellent customer serviceto Devon for its midstream needs for years, and that proved to be the foundation of this merger.”
Clearly, Devon is taking over Crosstex. From the webcast:
Devon will initially have a 70% interest in the General Partner with
the remaining 30% owned by current Crosstex Energy, Inc. public shareholders. The
General Partner will also own 50% of “Devon Holdings”, which will be available for
future drop-downs to the MLP. In addition, the General Partner will own
approximately 7% of the outstanding units in the new MLP, and 100% of the incentive
distribution rights.
In addition to its 70% interest in the General Partner, Devon will have a majority
interest of 53% in the new Master Limited Partnership. Existing Crosstex unitholders
will have 40% ownership, and as I touched on earlier, the new General Partner will
own the remaining 7% of the outstanding units.
Through the formation of this new business, Devon obtains a 70% interest in a publicly
traded general partner that is achieving the highest tier of incentive distribution
rights. As I mentioned earlier, reaching the “high splits” is very valuable for owners of
the general partner as it disproportionally increases its share of distributable cash
flow from the New Company. Compared to our previous standalone plan, this
accelerates the value of reaching the high-splits by at least three years. The higher
cash flow stream resulting from reaching the “high splits” and the improved overall
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growth outlook for the New Company should result in higher equity valuation for the
General Partner over time.
The high splits that Devon is suggesting indicates that the combined assets will pay off earlier than in their stand-alone model. Could they have dictated such terms and control over the new company if they merged with another partner? It is simply a guess to say that there should be a better partner out there. |
