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Sunoco Logistics-Energy Transfer deal: Cheaper together

'Compelling, at least' for bondholders

Stock investors haven't been too happy about Dallas-based Energy Transfer Partners' plan to fold itself into its Newtown Square-based Sunoco Logistics Partners LP affiliate, which my colleague Andrew Maykuth wrote about here.

But some bond investors, at least, are relieved. The combined companies could save $900 million a year by paying investors less after the reorganization, calculates Philip C. Adams CFA, analyst for Gimme Credit LLC in New York.

First, the stocks:
-- As of this morning, while energy stocks have mostly traded up, shares of ETP, the $34 billion pipelines-and-propane giant, are down 12% since the Nov. 21 announcement.
-- Shares of Sunoco Logistics, the $10.5 billion, Newtown Square-based pipelines-and-terminals operator, are off 11%. 
-- Shares of Sunoco LP, their $17 billion gas station, minimarket and fuel distribution affiliate, which will be 47% owned by the combined ETP-SNL, are down 9%.

But the financial rationale is "compelling, at least from a bondholder's viewpoint,"Adams wrote: As a "growth Master Limited Partnership" (MLP), ETP enjoyed favorable tax treatment in exchange for pumping out regular cash payments to shareholders. But that benefit dried up with energy prices and revenue growth, Adams points out.

So: Folding ETP into Sunoco Logistics has the effect of "reduc(ing) the total cash distribution" requirement, enabling the group to shore up its cash position, reduce its borrowing costs, and "conserve nearly $900 million annually" by not paying it directly to investors, Adams calculated, noting the companies haven't posted their own estimate.

ETP says the combined company will be wealthier and will eventually grow profits, enriching future shareholders.

The major ratings agencies have so far taken a cautious view of the deal, warning of possible downgrades. But Adams expects the combination will "be good for bondholders," since, with more cash at the company, they are more likely to get paid.

ETP also says it's likely to boost sales and cut costs by combining the two organizations. The merged companies, under Energy Transfer Partners' name and based in Texas, are to be run by ETP boss Kelcy Warren and his team.