NuStar Energy LP and NuStar GP Holdings LLC struck a unit-for-unit merger deal that would eliminate the 2% economic general partner interest and incentive distribution rights in the partnership and about 10.2 million NuStar common units held by NuStar GP.
Under the agreement, NuStar GP would merge with a subsidiary of NuStar, resulting in NuStar GP becoming a NuStar subsidiary, according to a Feb. 8 news release. Upon deal closing, NuStar GP unit holders are expected to get 0.55 of a NuStar common unit for every NuStar GP unit they own, equivalent to a premium of roughly 1.7% based on the two entities' closing prices on Feb. 7. NuStar would issue about 23.6 million additional common units under the transaction.
The deal is anticipated to result in a simplified corporate structure that would cut cost of capital and boost efficiency and transparency, according to Brad Barron, president and CEO of NuStar and NuStar GP. It would also reduce general and administrative costs by about $1 million per year.
William Greehey, chairman of the boards of NuStar and NuStar GP, agreed to vote the 21% of outstanding NuStar GP units that he controls in favor of the merger. "As the largest unit holder of NSH, I did not come to this decision lightly. I have always been a buyer of NSH and have never sold a unit. And I will continue to buy NuStar units. I would not recommend a simplification and reset if I did not truly believe that it will significantly improve the company's long-term health and growth, as well as long-term unit holder value," Greehey said.
NuStar's management team also plans to recommend a reset of its quarterly distribution to 60 cents per unit, or $2.40 on an annualized basis, beginning with the first-quarter distribution payable in May. The reset would cut annual distribution outflow by about $200 million per year after NuStar's issuance of new common units as part of the merger.
The reset is also expected to improve NuStar's coverage ratio in the near term, and reduce leverage and future needs to access capital markets in the long term.
"A fundamental shift has occurred in the makeup of the investor base for MLPs, which has tightened MLP equity markets and access to equity to finance important capital projects needed to grow and increase long-term unitholder value," Barron said. "Simultaneously, we have witnessed a paradigm shift in market sentiment away from strong growth fueled by continuous equity issuances to a market sentiment that favors strong distribution coverage and rewards MLPs for low leverage, less dependency on the equity markets, and increased self-funding of capital projects."
The merger is scheduled for completion in the second quarter.
Baird served as the financial adviser for NuStar GP's conflicts committee and Evercore served as the financial adviser for NuStar's nominating/governance and conflicts committee. Wachtell Lipton Rosen & Katz acted as the legal adviser for NuStar GP's conflicts committee, Richards Layton & Finger PA for NuStar's nominating/governance and conflicts committee and Sidley Austin LLP for NuStar.
