Quick Pitch: Green Plains Partners (GPP)
MLP Buyout – Upside TBD
TWO NEW MLP BUYOUTS
MLP buyouts with subsequently raised offers have been a successful theme for SSI lately – see SIRE, BKEP, PBFX and SHLX, (only GLOP has been an exception so far). This month, two fresh MLP buyouts by their GPs have been announced – Holly Energy Partners (HEP) and Green Plains Partners (GPP). Both are currently trading above the offer prices with the market expecting improved bids. Any higher offers will depend solely on the pushback by the conflict committees – both GPs own nearly 50% of respective MLPs making shareholder approvals just a formality. While the setups appear similar to the previous cases covered on SSI, I think that both of these are less attractive and offer only limited upside from the current trading levels. I am sharing a bit more detailed research on each of the names below.
Out of the two, HEP’s setup looks more promising given the rather visible undervaluation of the company and stronger arguments for the improved offer. However, previous pipeline MLP buyout precedents suggest that the revised offer is unlikely to come anywhere near the full fair value of the company. The potential upside is probably only around 10%. Meanwhile, the GPP’s setup presents little to no support for a higher bid from the valuation perspective.
Merger considerations in both cases are in GPs’ stock rather than cash. This not only adds additional hedging complexity but also suggests lower chances of improved bids or lower chances of potential pushback from shareholders. Out of the 6 all-stock MLP buyout examples from 2015-2018 (NGLS, WPZ, AM, OKS, DM, EEP/SEP) only Enbridge acquisition of its subsidiaries EEP and ESP saw improved bids, however, the increase from the initial bids was fairly limited, at +9% and +10% for EEP and ESP respectively. Most of the more recent MLP buyouts have been done in cash.
Green Plains Partners (GPP) – MLP Buyout – Upside TBD
Just a quick note on GPP as I do not have many arguments in favor of a materially improved bid. The only real argument seems to be: “All the recent MLP buyouts saw their initial offers increased, so the same will happen here. And the downside is well protected while you wait”. For me, that does not seem sufficient, especially for a trade requiring hedging.
Green Plains Partners received a non-binding privatization proposal from its GP, Green Plains (GPRE). Merger consideration stands at 0.3913x GPRE per each unit GPP and the offer came at a 3.5% premium to pre-announcement prices. Currently, GPP shares are trading at a 6% premium to the offer price or a 2% premium if the next quarterly GPP dividend is taken into account. The conflicts committee is reviewing the proposal and might push for a higher one. The GP owns 49.8% of the target’s shares, so shareholder approval is just a formality.
GPP owns ethanol storage and transportation assets. These assets exist pretty much solely to serve GPRE’s eleven ethanol plants. Revenues from GPRE generate 95% of the total. Dividends were cut by 75% during 2020, however, since then, distributions and coverage ratio have already pretty much reverted to pre-COVID levels. With the latest coverage ratio at 1x, GPP is already paying out all of its distributable cash flow to unitholders. At a quick glance, GPP units might appear undervalued due to the 15% dividend yield. However, the company has always traded at similar yield levels even though it was paying out a very stable/growing dividend in pre-Covid years. This high yield might be tied to the perceived volatility of the ethanol industry, which has historically been capital-intensive and value-destructive, with a number of ethanol producers like GPRE operating at a loss.
GPRE’s volume throughput has mostly been below or on the brink of GPP’s minimum volume commitment levels. Will these throughput levels improve going forward and result in higher revenues for GPP? Maybe. The Inflation Reduction Act has a number of incentives for ethanol producers which might push GPRE to produce more of it. But there is no visibility of higher ethanol volumes yet, allowing GPRE to argue that the current offer is fair. Also, with a 3-year-long business restructuring GPRE’s efforts seem to be shifting away from ethanol and towards higher value-add products, which also does not seem favorable for the GPP’s throughput volumes.