Targa Resources agrees to buy Atlas Pipeline, Atlas Energy

By ALEX NUSSBAUM
Bloomberg

Targa Resources and the partnership it controls agreed to buy Atlas Pipeline Partners and Atlas Energy for about $5.87 billion, adding to its ability to process, ship and export booming US natural gas output.

Targa Resources Partners is offering cash and units that value Atlas Pipeline at $38.66/unit, 15% more than the closing price on Friday, Houston-based Targa said in a statement. In addition, holders of Atlas Energy will get 0.1809 units in Targa Resources and $9.12 in cash after the company completes a spinoff of its exploration and production holdings.

The acquisition follows more than a dozen other deals among US pipeline companies this year, in an industry dominated by tax-advantaged partnerships and often complex corporate structures.

Targa, which owns a Gulf Coast plant to export natural gas liquids including propane and ethane, would gain a foothold in the Eagle Ford region of Texas as well as the Mississippi Lime and Woodford, where hydraulic fracturing and horizontal wells have unlocked oil and gas resources.

“With improved size and scale, the pro-forma business will be able to fund a combined multiyear, multibillion-dollar backlog of high returning organic projects utilizing a significantly lower cost of capital,” Eugene Dubay, CEO of Atlas, said in a separate statement.

Payments Grow

Targa expects quarterly payments to its holders to increase by as much as 13% next year as a result of the deal. Targa Resources agreed to cut additional payments it’s due to receive from the partnership it controls by $77.5 million over the next four years.

The acquisition bulks up Targa, formed in 2003 by its management and private-equity firm Warburg Pincus. The corporation owns the general partner and about 11% of the traded units in Targa Resources Partners. The other export terminal owner on the Gulf is Enterprise Products, the biggest pipeline operator in the US by market value.

“A combination of Targa and Atlas makes strategic sense; it would expand Targa’s strong presence in the rapidly growing Permian Basin” while allowing Targa to grow in other regions as well, Abhishek Sinha, a Houston-based analyst for Wunderlich Securities, wrote in a note.

Targa Talks

Targa was in talks this year to be bought by Kelcy Warren’s Energy Transfer Equity at a price of more than $15 billion, two people with knowledge of the matter said in June. Those negotiations ended without an agreement.

Kinder Morgan announced plans to simplify its structure in August with a series of transactions to acquire associated pipeline limited partnerships for $44 billion.

The Atlas Energy spinoff will control Atlas Resource Partners, a publicly traded oil and gas producer with a $1.23 billion market value. It will also own 25 million shares in Atlas Resource Partners, today worth about $376.8 million. In addition, the new company will have 11.5 million cubic feet/day of production and a stake in Arc Logistics Partners, a fuel-terminal owner.

Atlas Spinoff

The deal offers a reprieve for Atlas shareholders who had seen prices plummet amid criticism of Atlas Resource's holdings. Before today, Atlas Resource had lost 21% this year and Atlas Energy 31%.

The deal and spinoff are a “transformative solution to the present undervaluation,” Edward Cohen, Atlas Energy’s CEO, said in a conference call with analysts and investors.

Atlas Resource has suffered from lower commodity prices. The company has also been attacked by short-sellers, who profit when a stock falls, Cohen said on the call.

“We’re just extremely disappointed at the market’s failure to recognize the things we’re accomplishing,” he said.

He hinted at the possibility of further deals: “There are a lot of alternative strategies that we’ve been looking at” to obtain “fair market value” for the exploration company, Cohen said. “Stay tuned.”

Atlas Resource rose less than 1% to $16.33.

The Atlas Pipeline acquisition, in which holders will receive $1.26 in cash and 0.5846 units of Targa Resources Partners for each unit they own, is valued at $4 billion not including $1.8 billion in assumed debt. The Atlas Energy takeover amounts to $1.87 billion.

Deal Advisers

Citigroup advised Atlas Energy and Atlas Pipeline. Deutsche Bank and RBC Capital Markets also advised Atlas Energy and Stifel, Nicolaus & Co. advised a special conflicts committee. Evercore Partners advised Targa Resources Partners and a special committee of the board and Wells Fargo & Co. advised Targa Resources.

Wachtell, Lipton, Rosen & Katz gave legal advice to Atlas Pipeline and Covington & Burling advised the special conflicts committee. Vinson & Elkins advised Targa and Richards, Layton & Finger gave counsel to the special committee.

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