Energy Transfer buys Sunoco for $5.3 billion

Purchase expands Energy's ability to ship higher margin oil and natural gas liquids

Sunoco fueling station Sunoco fueling station

April 30 (Bloomberg) -- Energy Transfer Partners LP, owner of about 23,500 miles of natural-gas pipelines, agreed to buy Sunoco Inc. for $5.3 billion, expanding its ability to ship higher margin oil and natural gas liquids.

Sunoco holders will receive about $50.13 a share, consisting of $25 in cash and 0.5245 common units of Energy Transfer, according to a joint statement today. Dallas-based Energy Transfer is paying a 23 percent premium above the April 27 closing price for Sunoco.

Sunoco, based in Philadelphia, has been shutting or selling its refineries and said in September it was considering a possible sale.Energy Transfer Chief Executive Officer and Chairman Kelcy Warren has been trying to transform the company from a regional gas shipper in Texas to a national logistics operation that handles oil, refined products and natural gas liquids.

“As a result of the diversification this transaction provides, we’ll have repositioned ourselves from being almost a pure play natural-gas pipeline company to a much broader more diversified enterprise,” Warren said on a conference call today. The company is looking for opportunities to switch underutilized gas pipelines to oil, he said.

The purchase adds 4,900 Sunoco-branded retail fueling stations in the U.S. as well as its 32.4 percent share of Sunoco Logistics Partners LP’s common units. The partnership, which Sunoco controls through its general partner, owns 7,900 miles (12,700 kilometers) of oil pipelines, according to the statement.

Commodities Mix

The transaction not only diversifies Energy Transfer’s mix of commodities, it expands its geographic footprint, said Darren Horowitz, an analyst with Raymond James & Associates Inc. in Houston.

“It opens the door for greater growth,” Horowitz said in a telephone interview today. He rates Energy Transfer at market perform, on par with its peers, and doesn’t own any of its units.

Sunoco gained 20 percent to $49.29 at the close in New York. Energy Transfer Partners rose 3.6 percent to $49.63.

When the purchase is complete, Energy Transfer expects to get about 30 percent of its cash flow from “heavier hydrocarbons” such as oil, refined fuels and natural gas liquids, like propane and butane, Warren said in the statement. The profit for shipping crude on pipelines is better than gas, he said.

Oil Pipelines

Energy Transfer is already considering switching its Texoma gas pipeline in East Texas to oil. The pipeline connects to Sunoco’s oil terminal at Nederland, Texas, Warren said in a phone interview today. Energy Transfer may also convert part of the Trunkline system, which runs from the Gulf Coast to the Chicago area and Michigan, to oil from gas, he said.

Sunoco’s retail business is “not core” for Energy Transfer, Warren said. The retail units may be put into a master-limited partnership, Sunoco CEO Brian MacDonald said on the call.

Energy Transfer Partners is controlled by Dallas-based Energy Transfer Equity LP. Energy Transfer Equity bought Southern Union Co. last month for $5.4 billion, almost doubling its gas-pipeline network.

Exiting Refining

Sunoco, an owner of oil refineries since 1895, announced plans in September to exit that business after a $1.7 billion loss in 2011 as the profit margin on producing fuel shrank to the lowest point since 2009, according to data compiled by Bloomberg. It shuttered two plants and now operates one refinery in Philadelphia.

Sunoco said last week that it was in talks with Carlyle Group LP to take over operations at the Philadelphia refinery, which it had previously said it will close. The Carlyle talks will continue, Sunoco’s MacDonald said.

Sunoco’s exit from refining will be completed, according to the statement.

Energy Transfer’s $1 billion of 6.5 percent senior unsecured notes maturing in February 2042 slumped 4.7 cents to 102.7 on the dollar to yield 6.3 percent, the highest ever, at 11:58 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s the biggest fall since the bonds started trading on Jan. 11.

Transaction Premium

The transaction, supported by both boards, is expected to close in the second half and needs approval of shareholders and regulators, according to the statement. The companies anticipate merger savings of $70 million and the deal includes a $225 million breakup fee.

Energy Transfer’s 23 percent premium for Sunoco is less than the 48 percent average premium of 97 deals in the pipeline sector in North America in the past 12 months, according to data compiled by Bloomberg.

Wells Fargo & Co. was Energy Transfer Partners’ financial adviser and Latham & Watkins LLP, Bingham McCutchen LLP and Morris, Nichols Archt and Tunnel LLP acted as legal counsel. Credit Suisse was Sunoco’s financial adviser and Wachtell, Lipton, Rosen & Katz was its legal adviser.

Bloomberg News

--With assistance from Sridhar Natarajan in New York. Editors: Jessica Resnick-Ault, Tina Davis

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