Tallgrass Investors Catch a Break

Yesterday Blackstone (BX) surprised Tallgrass Equity (TGE) investors by sweetening their offer for the shares they don’t own to match the price they originally paid in March. It marks a victory for Limited Partners in TGE, which retained its partnership structure even though it’s taxed at a corporation so as to avoid issuing K-1s.

The sideletter that provided a floor on the price management received for their LP units was unfair, and caused us to criticize it in September (see Blackstone and Tallgrass Further Discredit the MLP Model) when BX announced their offer to acquire the remainder of the shares. Most sell-side analysts were embarrassingly silent in standing up for their investors, conflicted as they are by the desire to win banking mandates from the protagonists. RW Baird’s Ethan Bellamy is a standout exception, unafraid to raise awkward questions during earnings calls, which renders his research opinions more credible. Other sell-side analysts should take note.

TGE CEO David Dehaemers claimed not to understand (see Tallgrass Responds to Critics, Missing the Point) and with nobody else publicly taking his side, he brought forward his retirement. This ended a disappointing episode in an otherwise successful career.

Although the degree of sweetening from BX was a surprise, once they’d invested in TGE it always made sense for them to acquire the rest. Having a public equity position in a private equity portfolio adds unwelcome valuation realism. Private equity funds are reporting far better investment returns than public markets (see Private Equity, Private Valuations), even though they occasionally commit some howlers (see Leverage Wipes Out Investor’s Bet on Enlink). GIP’s 44% partial ownership of Enlink (ENLC) can hardly be their desired position – they’ll either buy the rest or exit, realizing a substantial loss. Information on GIP’s intentions has been sparse. PE investments rarely lose value as quickly as this one, and explaining it has been an unwelcome distraction for GIP’s overworked investor relations people.

TGE’s pending disappearance as a public company also represents another step in the shrinking universe available to Alerian’s MLP indices. TGE was a 4.7% weight in the Alerian MLP and Infrastructure Index (AMZI), followed by the tax-burdened ETF AMLP (see MLP Funds Made for Uncle Sam). TGE is far less than 4.7% of North American midstream energy infrastructure, as shown by its 2.4% weight in the American Energy Independence Index. Because AMZI is limited to partnerships, the TGE proceeds will have to be reallocated across a subset of the pipeline sector, further increasing AMLP’s concentration and rendering it even less representative (see AMLP’s Shrinking Investor Base).

Print Friendly, PDF & Email

Important Disclosures

The information provided is for informational purposes only and investors should determine for themselves whether a particular service, security or product is suitable for their investment needs. The information contained herein is not complete, may not be current, is subject to change, and is subject to, and qualified in its entirety by, the more complete disclosures, risk factors and other terms that are contained in the disclosure, prospectus, and offering. Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy,  completeness or timeliness of this information. Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments.  Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.

References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses. There can be no assurance that current investments will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing of the purchase. Indexes and benchmarks may not directly correlate or only partially relate to portfolios managed by SL Advisors as they have different underlying investments and may use different strategies or have different objectives than portfolios managed by SL Advisors (e.g. The Alerian index is a group MLP securities in the oil and gas industries. Portfolios may not include the same investments that are included in the Alerian Index. The S & P Index does not directly relate to investment strategies managed by SL Advisers.)

This site may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involves a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of SL Advisors LLC or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made. r

Certain hyperlinks or referenced websites on the Site, if any, are for your convenience and forward you to third parties’ websites, which generally are recognized by their top level domain name. Any descriptions of, references to, or links to other products, publications or services does not constitute an endorsement, authorization, sponsorship by or affiliation with SL Advisors LLC with respect to any linked site or its sponsor, unless expressly stated by SL Advisors LLC. Any such information, products or sites have not necessarily been reviewed by SL Advisors LLC and are provided or maintained by third parties over whom SL Advisors LLC exercise no control. SL Advisors LLC expressly disclaim any responsibility for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on these third-party sites.

All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.

Past performance of the American Energy Independence Index is not indicative of future returns.

Print Friendly, PDF & Email
1 reply
  1. Darren McCammon
    Darren McCammon says:

    Oh come now, you really should take more of a victory lap than that! Congratulations on championing investor disgust with the TGE side letter. You served not just TGE unitholders but also the sector as a whole. Management teams should be that much more hesitant the next time around.

    Reply

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.