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Corporate governance concerns overshadow Tallgrass buyout offer

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Corporate governance concerns overshadow Tallgrass buyout offer

A buyout offer from Blackstone Group Inc.'s infrastructure arm sent Tallgrass Energy LP's stock price soaring, but the gap between what public investors and management would get in the event of a take-private deal roused serious concerns about corporate governance from some industry analysts and portfolio managers.

Blackstone Infrastructure Partners, its partners and affiliates offered to buy the pipeline master limited partnership's outstanding shares for $19.50 per share, representing a 35.9% premium over the closing price of $14.35 per unit on Aug. 27. Tallgrass shares spiked 35.6% to settle at $19.46 per unit on Aug. 28 following the announcement, which many industry experts expected due to the company's struggling stock price and Blackstone's access to lower-cost capital amid re-contracting concerns surrounding the Rockies Express Pipeline LLC natural gas system and Pony Express crude oil pipeline system.

The $19.50 per unit that Blackstone offered public shareholders, however, is distinctly lower than the $26.25 per unit that some members of Tallgrass' management team would receive in the event of a buyout before March 2020, should they choose to divest their interests, according to a March side letter filed with the SEC. If the transaction occurs after that date, the letter said, those executives would still get a cash payout equivalent to $3.82 per share that analysts at MUFG Securities Americas Inc. calculated would total approximately $18 million.

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Simon Lack, managing partner of energy-focused investment firm SL Advisors LLC, said that while Tallgrass' management did not necessarily drive stock prices down to trigger a buyout, the side letter represents "a serious judgment lapse" on the part of CEO David Dehaemers Jr.

"No SEC-registered asset manager could do to its investors what [Tallgrass] management is doing to theirs," he wrote in a Sept. 2 blog post. "One might initially regard the elevated price for management's [Tallgrass] shares as nothing more than a bonus for selling the company. But because the $26.25 price is independent of the price at which the company is sold, the side letter breaks the alignment of interests that exists when management owns shares alongside investors."

Analysts at Morningstar agreed in an Aug. 28 note to clients that the difference between what public shareholders and insiders were offered is "a poor example of corporate governance," while CBRE Clarion Securities portfolio manager and MLP expert Hinds Howard wrote in an Aug. 31 blog post that negotiations could produce a "higher bid or lower pricing for management shares in the ultimate agreement."

Since Blackstone Infrastructure Partners closed a roughly $3.2 billion acquisition of a 44% interest in Tallgrass and full membership interest in its general partner on March 11, the midstream partnership's shares tanked 36.5% as of the Aug. 27 market close.

Dehaemers on May 7 made a point to reassure investors that the transaction did not raise the risk of Blackstone buying the rest of the company cheaply.

"There is no intention of Blackstone doing anything here untoward," he said. "They bought it to make money. They did not buy it to screw anybody, just to be real blunt about it. And for anybody to [postulate] anything else out there is patently false, ridiculous and fraudulent."

More pipeline companies have been targeted by private equity firms as public equity costs remain prohibitively high and institutional investors pressure management teams to shift their focus from distribution payments to cash retention. Global Infrastructure Partners in 2018 purchased Devon Energy Corp.'s stake in EnLink Midstream LLC and its MLP, while Buckeye Partners LP in May announced that a fund managed by Australia's IFM Investors agreed to take the MLP private in an all-cash deal.

Howard said Blackstone's buyout offer for Tallgrass would "put a floor on several other stocks that have meaningful private equity ownership or relationships combined with poor stock price performance," including EnLink, SemGroup Corp., Summit Midstream Partners LP and Targa Resources Corp.