Boardwalk Pipeline Partners (BWP) – Unit Buyout – 14%+ upside

Current Price – $10.2

Merger Consideration – $11.6+

Upside – 14%+

Expiration Date – Aug, 2018

 

Boardwalk Pipeline is an MLP that is 51% owned by Loews, which also happens to be its GP. At the end of April Loews announced that it is seriously considering exercising its call right to acquire the remaining 49% of BWP units owned by minority holders at a price to be calculated based on formula (average of 180 days of closing prices). However, Loews did not reveal anything with certainty or anything regarding the timing. This caused share price to drop 20% (recovered half way since) as market got scared that Loews will drag out acquisition process till the average price gets more favorable. Other shareholders got vocal as well (here and here).

For further background info as well as regulatory taxation changes that lead to current situation please refer to recent SeekingAlpha and Barron’s articles.

The bet here is that Loews will try to avoid potential litigation by not dragging out the process and will buyout minority holders before the average prices over the last 180 trading days drop below $11.6+

There are two main uncertainties here:

  • Whether Loews will exercise its right and where will BWP trade if it does not;
  • Expected timing of the transaction, which will also determine the buyout price.

The first one is a bit of a guesswork. As can be seen from Barron’s article, BWP share price underperformed MLP index this year and Loews might see this as opportunity to acquire BWP cheaply. If Loews had no real intentions to buy out BWP minority unitholders I doubt they would have mentioned anything regarding the call right. If Loews backs off, then it is likely share price would revert to pre-announcement levels of $11.

Timing is the second uncertainty. Limited Partnership Agreement says:

(b) Notwithstanding any other provision of this Agreement, if at any time: (i) the General Partner and its Affiliates hold more than 50% of the total Limited Partner Interests of all classes then Outstanding and (ii) the General Partner receives an Opinion of Counsel that the Partnership’s status as an association not taxable as a corporation and not otherwise subject to an entity-level tax for federal, state or local income tax purposes has or will reasonably likely in the future have a material adverse effect on the maximum applicable rate that can be charged to customers by subsidiaries of the Partnership that are regulated interstate natural gas pipelines, then the General Partner shall then have the right, which right it may assign and transfer in whole or in part to the Partnership or any Affiliate of the General Partner, exercisable at its option within 90 days of receipt of such opinion, to purchase all, but not less than all, of all Limited Partner Interests then Outstanding held by Persons other than the General Partner and its Affiliates, at a purchase price for each class of Limited Partner Interests equal to the average of the daily Closing Prices per Limited Partner Interest of such class for the 180 consecutive Trading Days immediately prior to the date three days prior to the date that the notice described in Section 15.1(c) is mailed.

(c) If the General Partner, any Affiliate of the General Partner or the Partnership elects to exercise the right to purchase Limited Partner Interests granted pursuant to Section 15.1(a) or (b), the General Partner shall deliver to the Transfer Agent notice of such election to purchase (the “Notice of Election to Purchase”) and shall cause the Transfer Agent to mail a copy of such Notice of Election to Purchase to the Record Holders of Limited Partner Interests of such class or classes (as of a Record Date selected by the General Partner) at least 10, but not more than 60, days prior to the Purchase Date

Opinion of Counsel means a written opinion of counsel (who may be regular counsel to the Partnership or the General Partner or any of its Affiliates) acceptable to the General Partner.

All timing eventually ties to the date on which ‘Opinion of Counsel’ was received. So the expected timing of transaction can be constructed in the following way (with P indicating expected Purchase date:

  • P-90 - General Partner received Opinion of Counsel;
  • P-14 – The last day for calculation of the purchase price, comprised of average closing prices during previous 180 trading days;
  • P-10 – The latest date shareholders need to be notified about the purchase;
  • P – Purchase date.

Management has not revealed whether ‘Opinion of Counsel’ has been received or when (it has full discretion on timing). The risk is that Loews delays this part which would extend the acquisition and lower the average price. However, due to this Loews might be accused of price manipulation and expose itself to potential litigation. So an argument could be made that Opinion of Counsel was received at the time or before Loews made public its ‘serious considerations’ to buy out minority holders.

Below are number of scenarios with different dates for Opinion of Counsel (assuming price for the remaining trading days remains at current $10.25).

Price table

As can be seen from these calculation even if Loews extends the buyout till the end of the year, the resulting purchase price would remain above current levels. Obviously, this analysis assumes that Loews will proceed with the buyout and that the unit price will remain on average at $10.25.

Currently I am betting that Opinion of Counsel was received before Loews announcement (i.e. before 30/04/18) which would suggest that shareholders will be notified about the buyout over the coming month and units will be acquired at $11.6+, which is 13.5% upside to current prices.

Another way to trade this is through options or spreads - with the increased risk of loosing entire investment with OTM options if the assumptions above do not materialize.

I am long straight equity and also long September call spread.

15 COMMENTS

  1. Thinley w

    Thanks for the article DT. If Loews backs off, why do you think that the share price would revert to pre-announcement levels of $11?

    1. dt

      No hard reason for that. This is where BWP traded before investors started digesting what Loews call right really means. The stock actually traded up (to $12.7) in the first half an hour after Q1 result announcement (30th of April). Then during conference call management mentioned that Loews is considering exercising its call right and that 13D would be filed later that day (which happened around 12pm). The start of the decline in the stock price approximately coincided with management’s announcement during the call. So from this I am guessing that market viewed Q1 results as quite favorable (stock was up almost 15%) and then Loews announcement simply killed it all.

      I do not have any strong arguments from valuation perspective if you are asking for that.

  2. makarid makarid

    Thank you dt for this idea. In the post your are writing “expiration date: Aug, 2018″.Any reason for that? Is this an estimate or there is somewhere written?Thanks

    1. dt

      August selection is a bit arbitrary – simply if unit buyout is not announced over the summer I do not think the transaction will happen.

  3. makarid makarid

    Definitely something is going on,on the LP space. It has to be about the new tax rules or something.I don’t know what has changed,because i am not US citizen. There are 2 more mergers in LP space,one with OCI Partners (OCI with OCINF) and one with ClearBridge CEF (CBA with EMO).Maybe the latter has nothing to do with taxes because it is a CEF,but i don’t believe that it is coincidence. LP’s are attractive for some tax reason.

  4. Rick Sanchez

    bit of a price move up today on 6/25 (up 6%) on no news, vs. Alerian MLP Index down 2%

  5. Kevin Chang

    BWP +7% today.

    Apparently there’s talk of Loews settling?

  6. Rick Sanchez

    A Delaware judge gave the green light to a public settlement of a lawsuit brought by a pair of Boardwalk Pipeline Partners LP investors that accused Boardwalk’s holding company and parent Loews Corp. of tanking Boardwalk’s stock price to make it a more attractive buyout target for Loews.

    Vice Chancellor J. Travis Laster of the Delaware Court of Chancery on June 25 issued a letter to the legal teams for the investors — TAM Capital Management Inc. President Tsachy Mishal and Paul Berger, who personally owned a combined 533,938 common units of Boardwalk as of May 22 — as well as the partnership, Loews and subsidiary Boardwalk Pipelines Holding Corp., encouraging them to present a negotiated settlement to the court publicly.
    —————————————————————————————————————–
    From the COURT OF CHANCERY OF THE STATE OF DELAWARE dated 6/25/2018:

    Dear Counsel:
    The in camera presentation that counsel has proposed seeks an advisory opinion about settlement approval. The parties should follow the standard practice of presenting a settlement. The fact that the terms could be market-moving does not warrant departing from regular order. Many aspects of this court’s docket have market-price implications. If counsel have concluded that the terms of the settlement fall within a range of reasonableness and should be approved, then they should proceed with confidence. If the fairness of the settlement is so dubious as to require an advisory opinion before counsel are willing to make it public, then perhaps it should not be presented.

    Sincerely yours,
    J. Travis Laster
    Vice Chancellor

    1. dt

      Just realized that in my calculations I have used adjusted closing prices (which adjusts for dividend payouts). The actual closing prices were higher. Correcting for this the 180-day average ending June 29th is expected to be c. $12.05 per share.

  7. work 22

    good call— BWP just settled the class action lawsuit. Trading $11.46 bid pre market Tuesday June 26th…

  8. Rick Sanchez

    do you guys plan to hold until next week then? I’m of a mind to lock in my gains now

  9. Rick Sanchez

    Loews says the GP will purchase the transaction units on July 18 for $12.06/unit, totaling ~$1.5B.
    Thanks again for the idea!

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