TULSA, Okla. (OBV) – Two major Oklahoma energy infrastructure companies are merging in a transaction valued at just shy of $19 billion.
ONEOK, Inc., and Magellan Midstream Partners, L.P. announced the merger Sunday in which ONEOK will acquire all Magellan units, including assumed debt, in a cash-and-stock transaction worth $18.8 billion. The total enterprise value of the combined company will be $60 billion, according to a news release issued by the two companies. Magellan will be come a 100 percent wholly-owned subsidiary of ONEOK.
Each companies president expects substantial growth and success from the merger.
“ONEOK has a long history and track record of being at the forefront of transformational transactions. The combination of ONEOK and Magellan will create a diversified North American midstream infrastructure company with predominately fee-based earnings, a strong balance sheet and significant financial flexibility focused on delivering essential energy products and services to our customers and continued strong returns to investors,” said Pierce H. Norton II, ONEOK president and chief executive officer. “Our expanded products platform will present further opportunities in our core businesses as well as enhance our ability to participate in the ongoing energy transformation with an increased presence in sustainable fuel and hydrogen corridors. We are excited about the future of our combined companies and look forward to welcoming Magellan’s well-respected employees to ONEOK.”
ONEOK and Magellan have matching visions, said Aaron Milford, Magellan president and chief executive officer.
“Throughout more than 20 years as a publicly traded company, Magellan has remained focused on safe and responsible operations, financial discipline and long-term investor value. We believe ONEOK shares these priorities, and we are pleased to join them in creating a stronger, more diversified midstream company,” Milford said. “We believe the premium offered maximizes value creation for Magellan’s unitholders and reflects the essential nature of Magellan’s assets and service offerings as well as the quality of our talented and innovative employees. This transaction provides a significant upfront cash component and an opportunity for Magellan investors to benefit from the attractive cash dividend offered by the combined company going forward.”
The following strategic items were listed as strategic rational for the merger:
- Brings together two premier energy infrastructure businesses with strong returns on invested capital and diverse free cash flow generation: The transaction adds a leading, and primarily fee-based, refined products and crude oil transportation business to ONEOK. Magellan’s stable, primarily demand-driven businesses are expected to generate significant free cash flow due to low capital expenditure requirements. This acquisition creates a more resilient energy infrastructure company that is expected to produce stable cash flows through diverse commodity cycles.
- Expect to achieve immediate financial benefits, including cost, operational and tax synergies, supporting meaningful expected accretion: The transaction is expected to be earnings per share (EPS) accretive beginning in 2024 with EPS accretion of 3% to 7% per year from 2025 through 2027, and free cash flow per share accretion averaging more than 20 percent from 2024 through 2027. Base forecasted synergies are expected to total at least $200 million annually.
From a tax perspective, ONEOK expects to benefit from the step-up in Magellan’s tax basis from the transaction, thus deferring the expected impact of the new corporate alternative minimum tax from 2024 to 2027. The benefit from the basis step-up has an estimated total value of approximately $3.0 billion, which has an estimated net present value of approximately $1.5 billion. Utilization of expected tax attributes could increase if additional capital projects are put into service or acquisitions are completed, which may increase the net present value of future tax deferrals.
- Compelling long-term value proposition driven by consistent and disciplined capital allocation philosophy: The combined company is expected to experience a step change in free cash flow after dividends and growth capital by generating an average annual amount of approximately $1.0 billion in the first four years following the expected transaction close. The increase in free cash flow will provide additional cash for debt reduction, growth capital and value returned to shareholders through dividends and/or repurchasing shares. ONEOK remains committed to growing both EPS and its common dividend while targeting a payout ratio of less than 85 percent.
- Complementary and diversified asset positions with potential for additional cost and commercial synergies over time: The combined company will own more than 25,000 miles of liquids-oriented pipelines, with significant assets and operational expertise at the Gulf Coast and Mid-Continent market hubs. ONEOK anticipates this combined liquids-focused portfolio will present significant potential for enhanced customer product offerings and increased international export opportunities. We believe these activities could potentially result in total annual transaction synergies exceeding $400 million within two to four years.
- Strong investment-grade credit ratings with enhanced scale and diversification: The combined company expects pro-forma 2024 year-end net debt-to-EBITDA of approximately 4.0 times. ONEOK expects leverage to decrease below 3.5 times by 2026 as future growth projects are placed in service. Excluding certain large projects that have not yet received a final investment decision from the expected net debt-to-EBITDA calculation would accelerate the timeframe to achieve 3.5 times by approximately one year.
“Together, we intend to create a more resilient, highly diversified North American infrastructure company, with nearly 50,000 miles of differentiated pipelines,” according to Bruce Heine, vice president of Government and Media Affairs at Magellan.
Magellan unitholders will receive $25 cash and 0.6670 shares of ONEOK stock per unit, a 22 percent premium to the Magellan closing price on May 12, 2023.
The transaction is expected to be completed in the third quarter of 2023; it has been unanimously approved by each company’s board of directors. ONEOK secured $5.25 billion in fully-committed bridge financing for the proposed cash consideration. The transaction’s closing is subject to customary closing conditions, including the approvals of both ONEOK shareholders and Magellan unitholders, as well as Hart Scott Rodino Act clearance.
“Until then, we will continue to operate as separate companies and it remains business as usual at both ONEOK and Magellan,” Heine said.
Norton will remain as the combined company’s chief executive officer. ONEOK intends to seek and nominate one or two director(s) serving on the board of Magellan’s general partner.
Magellan and ONEOK are both based in Tulsa. Headquarters will remain in Tulsa once the merger is complete, according to Heine.
“ONEOK and Magellan share a strong commitment to being involved in the communities where we all live and work, and look forward to building upon our relationships with community and non-profit organizations,” Heine said.