Sunoco LP to acquire pipeline operator NuStar Energy in $7.3bn deal

Sunoco LP (NYSE: SUN) and NuStar Energy L.P. (NYSE: NS) have announced a landmark all-equity transaction valued at approximately $7.3 billion, including assumed debt.

This merger is poised to reshape the landscape of the energy sector, combining Sunoco’s extensive distribution network with NuStar’s pipeline and storage capabilities.

Sunoco LP is a master limited partnership with a sprawling distribution network for motor fuel and a significant presence in refined product transportation and terminalling assets. NuStar Energy L.P. stands as an independent operator of liquids terminal and pipelines, boasting a substantial storage capacity and operations across the United States and Mexico.

Transaction Highlights

Under the definitive agreement, NuStar common unitholders are set to receive 0.400 Sunoco common units for each NuStar unit, marking a 24% premium over the 30-day volume-weighted average prices (VWAP) of both companies as of January 19, 2024. This strategic move is underpinned by a $1.6 billion bridge loan secured by Sunoco to refinance NuStar’s existing financial obligations, showcasing a well-orchestrated financial strategy aimed at streamlining operations post-merger.

The boards of directors of both Sunoco and NuStar have unanimously approved the deal, anticipating a closure in the second quarter of 2024, pending regulatory and NuStar unitholders’ approvals.

Strategic Rationale Behind the Merger

The merger is expected to deliver numerous strategic benefits:

– Increased Stability: By diversifying and scaling their operations, the combined entity aims to capture the benefits of vertical integration, ensuring a more stable business model.

– Financial Foundation: The deal continues Sunoco’s effective capital allocation strategy on a larger scale, aiming to enhance the credit profile and support distribution growth.

– Enhanced Growth: With increased cash flow, the merger opens avenues for reinvestment and growth across an expanded set of opportunities.

Financial Outlook

Financially, the merger is set to be immediately accretive, with expectations of over 10% accretion to distributable cash flow per LP unit by the third year. The companies also anticipate achieving at least $150 million of run-rate synergies by the third year, with around $50 million per year of additional cash flow from the refinancing of high-cost capital.

Advisors and Legal Counsel

Sunoco’s financial advisory was managed by Truist Securities, with legal advice from Weil, Gotshal & Manges LLP and Vinson & Elkins LLP. NuStar engaged Barclays as its exclusive financial advisor, with Wachtell, Lipton, Rosen & Katz and Sidley Austin LLP as legal advisors.

Analysis of the deal

The announced acquisition of NuStar Energy L.P. by Sunoco LP in an all-equity transaction valued at approximately $7.3 billion, including assumed debt, is a strategic maneuver that promises to significantly alter the landscape of the energy distribution and storage sector. This merger is not just a consolidation of assets but a deliberate step towards creating a vertically integrated behemoth with the capability to navigate the complexities of the current energy market more efficiently.

Strategic Implications of the Merger

The merger between Sunoco and NuStar strategically diversifies and scales operations, enhancing the stability of the combined entity. By integrating NuStar’s extensive pipeline and terminal operations with Sunoco’s distribution network, the merged company is positioned to capture efficiencies across the supply chain, from storage to the point of sale.

The financial outlook post-merger, with expectations of immediate accretion to distributable cash flow and significant run-rate synergies, indicates a strong financial rationale behind the transaction. The anticipated $150 million in synergies by the third year post-merger could result from operational efficiencies, cost savings, and optimized capital expenditure.

With an expanded operational base, the merged entity is well-placed to leverage growth opportunities across new and existing markets. The increased cash flow generation capability is expected to support reinvestment in growth initiatives and distribution growth, ensuring long-term value creation for stakeholders.

The strategic refinancing of NuStar’s high-cost capital with a $1.6 billion bridge loan not only streamlines the capital structure but also reduces financial costs. Achieving a leverage target of 4.0x within 12-18 months post-close is a testament to the merged entity’s robust financial planning and execution capabilities.

Challenges and Considerations

While the merger holds significant promise, the execution of such a large-scale integration will require meticulous planning and execution. The combined entity will need to navigate regulatory approvals, integrate disparate corporate cultures, and harmonize operational practices without disrupting ongoing operations. Moreover, achieving the projected synergies within the stipulated timeframe will be critical to realizing the full potential of the merger.

The Sunoco and NuStar merger is a bold step towards redefining the competitive dynamics within the energy distribution and storage sector. It reflects a strategic alignment with the industry’s broader trends towards consolidation, vertical integration, and financial optimization. If successfully executed, this merger could serve as a benchmark for similar transactions in the industry, demonstrating the value of strategic consolidation in unlocking growth and efficiency gains. However, the journey from announcement to realization of these strategic benefits will be closely watched by industry stakeholders and could offer valuable insights into the challenges and opportunities inherent in such large-scale mergers and acquisitions in the energy sector.