Stagnant stock prices and decreasing leverage make some pipeline master limited partnerships mathematically viable targets for leveraged buyouts, but not all midstream industry analysts are convinced that those conditions line up with what the companies' senior executives — who often have insider ownership — want to do.
Income-oriented investors' have increasingly exited the sector, and the influx of institutional shareholders who focus on long-term sustainability has shifted investor priorities from distribution growth to retaining more cash for funding equity needs. In many cases, midstream companies have responded to that change by eliminating required cash payments to general partners and trimming capital spending. The shift has resulted in lower debt-to-EBITDA ratios even as some management teams have continued to tap public debt.
Credit quality in the sector has strengthened, combining with flagging equity values to create the perfect storm for additional corporate acquisitions by private capital, likely in the form of transactions that involve both equity and borrowed funds, according to a July 31 Moody's report.
"While large midstream companies might be too big to be attractive [leveraged buyout, or LBO] candidates, mid-sized or smaller companies could allow for successful LBO execution and still provide adequate risk-adjusted returns," analysts wrote. "The LBO deal itself may raise credit costs, but not always enough to deter LBO interest."
The report was published less than two months after Buckeye Partners LP announced that a fund managed by Australia's IFM Investors agreed to take the struggling MLP private in an all-cash deal worth $10.3 billion in enterprise value and $6.5 billion in equity value.
Meanwhile, midstream analysts at UBS told clients July 10 that its LBO internal rate return formula showed eight scenarios with those rates "in line [with] or above [Buckeye's], suggesting the trend could mathematically continue."
Private equity may not hesitate to bid for weakened pipeline partnerships, likely favoring midstream players over financially distressed upstream operators, but they may struggle to find willing midstream management teams, some analysts said.
"LBOs are more likely in midstream than in upstream primarily because of greater private equity capital in midstream. There's a built-in group of willing buyers with capital to deploy," Robert W. Baird & Co.'s Ethan Bellamy said in an interview. But "the partnership structure is intrinsically a poison pill, making it effectively impossible to eject a general partner and to effect a change of control," Bellamy added, referring to the inside owners who control the majority of an MLP's stock.
CBRE Clarion Securities MLP expert Hinds Howard agreed that the Buckeye deal likely does not indicate a "big groundswell or movement at this point," and BMO Capital Markets analyst Danilo Juvane also said in an interview that he was skeptical that LBOs would become the midstream sector's "new normal."
They said a more plausible trend may be partial private equity acquisitions that hold the door open for a complete takeover such as Global Infrastructure Partners's 2018 purchase of Devon Energy Corp.'s stake in EnLink Midstream LLC and its MLP or the 2019 sale of a 44% interest in Tallgrass Energy LP and a 100% interest in its general partner to Blackstone Group Inc.'s infrastructure arm and two other investors.
Juvane acknowledged that there will always be some exceptions because "we've seen some stories just completely crack, so it does create room for opportune transactions going forward," and Howard listed SemGroup Corp. as a potential LBO target.
Still, the private firms with enough capital to take whole public companies private are not necessarily looking to do such large deals in the near term.
"The bigger question is: Who are the private equity firms that are left that haven't already played their hand?" Howard said. "I'm not sure there are that many ... that haven't already shot a lot of their midstream bullets."