American Midstream (AMID) – Merger Arbitrage – 15% Upside

Current Price – $3.90

Acquisition Price – $4.5

Upside – 15%

Expiration Date – Q2 2019

Buyout Offer

This idea was shared by Ilja.

 

ArcLight Capital Partners, a private equity firm focused on energy infrastructure assets is targeting their Oil & Gas MLP  American Midstream (AMID). The initial offer was made in late Sept for $6.1/share and amended for $4.5/share on the 3rd of January. The amendment came right after the cut in distribution, that made AMID stock plummet 30%. In light of these events, the ArcLight offer looks very opportunistic.

Given ArcLight’s 51% voting control the offer only needs to be approved by the independent Conflicts Committee. However, there is a lot of noise from the shareholders who are obviously dissatisfied with the price and are encouraging the committee to reject the offer.

Overall, I think that this is a heads I win, tails win even more type of situation and thus if the offer gets dismissed, ArcLight most likely will raise the price. If they don’t then it will still show that the management is valuing the company higher. Also it seems that some of the problems that trouble AMID can be taken care of in the short term, which would again have a positive effect on the share price.

Possibly, the spread reflects the fear of another price cut, however it is already at the level that the company was trading in early 2016, when oil price dropped to $30 (compared to current $50), so I highly doubt that another cut is possible.

Despite recent lowball and opportunistic offer, ArcLight appears to be credible and I don’t think they will walk away.

Worth noting that the spread went down to zero on the 28th of Jan without any official announcements or news, and then went back to 15% over the next two days.

 

Conflicts Committee

Conflicts committee is composed of 3 supposedly independent directors. I have tried to find any of their previous affiliations to ArcLight and couple points are listed below – nothing out of the ordinary.

• Peter Fasullo – principal and founder of En*Vantage – one of the leading energy management consultancy companies. Current Chairman/CEO of ArcLight was partner at En*Vantage;

• Donald Kendall – Managing Director and CEO of Kenmont Capital – no found affiliations;

• Gerald Tywoniuk – provided interim and project CFO services to AMID.

From the above I can only speculate how conflicted the Conflicts Committee really is (maybe it is truly independent), but in this rare case I would actually be very happy if the committee disregarded any objections from the minority shareholders and voted in favor of the ArcLight’s offer.

 

ArcLight

ArcLight Capital has a pretty rich portfolio of energy assets. They’ve done numerous large acquisitions in the past and control several big private equity funds, with the latest one launched in mid 2018. Overall, Arclight looks like a serious buyer, who should care about the continuity of the business and its reputation, however the recent buyout offers have caused some noise from the shareholders about the inadequate pricing.

• In July 2018 Arclight has made an offer to acquire TransMontaigne at a price of $38/share, that happened to be only 5% premium to the last closing price. However, despite the drop in oil prices 4 months later, ArcLight has sweetened the offer by 8% to $41.

• The outcome was different with AMID – just after the the announcement of distribution cut (31st Dec!) that resulted in AMID dropping 30%, ArcLight cut the offer price by 35%.

 

AMID Potentially Undervalued

American Midstream is a highly leveraged (5.5x) oil and gas infrastructure company, which gets most of its revenues from liquid pipelines and gas gathering/processing services. Main assets are in North Dakota, Texas and the Gulf Coast.

Since the beginning of 2018 AMID share price fell almost 75% due to several factors that are nicely outlined in the activist shareholder letters (here and here). This shareholder opposes the transaction, values AMID at $9/share and encourages the board continue to operate as a publicly listed company until the problems which AMID is facing are resolved.

Main points from the letters:

• ArcLight sold a 15.5% stake in Delta House (floating production system) to AMID for $125.4 million that within days or weeks of the September 29, 2017 closing saw volumes plummet from 120,000 barrels per day to 60,000 barrels per day on average.

• EBITDA and credit ratios have suffered as a result of the temporary shortfall and contributed to distribution cuts which lowered the share price.

• ArcLight subsequently signed a “Capital Contribution Agreement” in March 2018 to cover the shortfalls from Delta House, however author estimates that the amount ArcLight is paying is not enough to cover the actual EBITDA deficit and also states that AMID should demand full payment. Delta House should currently be able to work at the full capacity, so according to the author, AMID should remain listed to realize the full potential and EBITDA improvement.

• British Petroleum, which plans to grow in the Gulf of Mexico, has found out 1bn barrels of oil in a place, which the author believes to be in Delta House or Okeanos (another asset of AMID) catchment area. So ArcLight’s value assessment of the Delta House, should be changed to value the full capacity of the system (135k barrels/day instead of 120k), which means that the pricing of the current offer should be changed.

• If the company manages to divest their non-core assets as planned and Delta House manages to show its real earnings power, the author estimates that AMID can lower their leverage bellow 5x in short term and resume the distribution, which would significantly increase the share price.

Overall, the author states that Arclight has intentionally led AMID into these lows, just to buy it out cheaply. It is hard to say whether this is true or not, but from the stated timeline of events it definitely looks fishy.