Tallgrass Energy (TGE) – Merger Arbitrage – 42% Upside

Current Price: $15.82

Offer Price: $22.45/share

Upside: 42%

Expected Closing: Q2 2020

Proxy

On the 17th of December oil and gas pipeline company Tallgrass Energy has agreed to be acquired by Blackstone and Spanish energy company Enagas for $22.45/share in cash. Shareholder approval (majority of class A and Class B combined) should not be a problem as buyers already own 44% of TGE. Condition of minority shareholder approval has been removed during negotiations in exchange for higher buy-out price. The meeting date is set at the 16th of April.

Regulatory consent should also be a minor issue as it seems that no major approvals are needed: “None of TGE, TGE GP or the Blackstone Parties is aware of any federal or state regulatory approval required in connection with the Merger, other than compliance with applicable federal securities laws and applicable Delaware law”.

TGE shares used to trade at a tight 1% spread, which has widened materially with the market fall. Since then there has been no updates from the companies, however it is rumored that Blackstone intends to comply with its obligations (Mar 9  and Mar 20). Overall, Blackstone is a credible buyer that cares about its reputation, however due to the current turbulent times, the risk of this merger getting cancelled is still there.

Apparently the buyer has been interested in TGE for over a year already:

• January’19. Blackstone announced that it is acquiring a controlling interest (44%) in TGE for over $3bn. The deal was closed in March’19, while the paid price was not far from $24/share.
• August’19. TGE has received a non-binding proposal from Blackstone, priced at $19.50/share for class A shares and $26.50/share for class B (owned by the general partner of TGE).
• September. 9.5% holder Tortoise capital (currently owns 4.2%) urged the company to seek a higher bid. Although the offer was priced at 36% premium to pre-announcement price, it was also 40% that the price Blackstone paid in March. Moreover, shareholders were dissatisfied with a much higher consideration for the management.
• October. TGE CEO says that the consideration paid for the general partner is higher as it assumes compensation for retention, non-compete agreements and share sales restrictions.
• December. A current offer is announced with a sweetened price for class A shareholders ($22.45/share).