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Blackstone's updated Tallgrass buyout bid wins over investors, analysts

Investors and industry analysts applauded The Blackstone Group Inc.'s revised offer for taking Tallgrass Energy LP private following months of pressure on the pipeline company to increase public unit holders' compensation for a buyout.

Under the merger agreement announced Dec. 17, Tallgrass will sell its outstanding common shares to affiliates of Blackstone's infrastructure arm and other buyers for $22.45 per share, an approximate 15% premium to the $19.50 per share offered Aug. 28.

The gap between that original price and the $26.25 per unit that some members of Tallgrass's management team would receive in the event of a buyout before March 2020 — should they choose to divest their interests — had become a major governance concern and equity value overhang, with shares falling 36.5% between Blackstone Infrastructure Partners' March acquisition of an interest in the company and the Aug. 27 market close.

Tallgrass shares on Dec. 17, meanwhile, were up 21% during morning trading on news of the deal. The transaction is scheduled to close in the second quarter of 2020 and came as a pleasant surprise as well as a good omen for the industry to some analysts.

"While we expected the original deal to proceed, we viewed the odds of an improved offer as quite slim," analysts at Tudor Pickering Holt & Co. wrote in a Dec. 17 note to clients. "Lofty valuation marker and elimination of gap between LP and management offers a notable positive for the sector — we expect incremental private capital to be primarily oriented to operators one degree removed from the wellhead biasing read-throughs downstream."

Blackstone's bid also resonated with CBRE Clarion Securities portfolio manager and master limited partnership expert Hinds Howard, who said in a Dec. 17 tweet that it is "much more than a sweetener[;] it's like a second takeout premium."

Analysts at Robert W. Baird & Co., however, noted there is still a substantial difference between what public shareholders and insiders will get.

"With the downdraft in midstream equities since the original transaction, we applaud the independent committee for squeezing extra value from [Blackstone] for common shareholders," they wrote in a Dec. 17 note to clients, referencing Blackstone's roughly $3.2 billion acquisition of a 44% interest in Tallgrass and full membership interest in its general partner earlier this year. "Nevertheless, with no mention in the release, we expect common holders will still receive 17% less than a block of insider stock, which will trade at $26.25/share based on a side letter agreement."

Former Tallgrass CEO David Dehaemers Jr., who resigned in November, had earnestly defended Blackstone's original bid during an October conference call and blamed the pipeline company's biggest shareholders for the stock price slump.

"People are … entitled to their opinions; they're not entitled to their own set of facts," he said. "Any characterization that members of management are getting paid a higher value for giving up the exact same thing as [limited partner] owners is patently false, as is any other characterization that management engineered something where they had nothing to lose and everything to gain."