ONEOK shares drop as analysts question logic to buy Magellan Midstream for $18.8B

ONEOK (NYSE:) announced yesterday that it has an agreement in place to acquire Magellan Midstream Partners (NYSE:) in a cash-and-stock deal valued at $18.8 billion.

The combined company is expected to have a total enterprise value of $60B. OKE said it will pay $25.00 in cash and 0.6670 shares of its common stock for each outstanding MMP unit.

“The combination of ONEOK and Magellan will create a diversified North American midstream infrastructure company with predominately fee-based earnings, a strong balance sheet and significant financial flexibility focused on delivering essential energy products and services to our customers and continued strong returns to investors,” said Pierce H. Norton II, ONEOK president and chief executive officer.

The agreed price represents a premium of 22% based on the May 12 closing prices. The transaction is expected to close in the third quarter of 2023.

“We believe the premium offered maximizes value creation for Magellan’s unitholders and reflects the essential nature of Magellan’s assets and service offerings as well as the quality of our talented and innovative employees. This transaction provides a significant upfront cash component and an opportunity for Magellan investors to benefit from the attractive cash dividend offered by the combined company going forward,” said Aaron Milford, Magellan president and chief executive officer.

Still, ONEOK shares trade nearly 6% lower in pre-market Monday as some analysts said that investors may prefer the company to keep its focus on natural gas.

Stifel analysts weighed in positively on the acquisition as it will provide ONEOK with an increased scale and diversity of assets.

“While it’s easy to see the attractiveness of acquiring refined and crude assets to diversify operations, OKE holders may have preferred the company to keep its natural gas and NGL focus and expand its footprint in Texas by acquiring G&P assets. In addition, Magellan unit holders are facing a taxable transaction which will create numerous headaches,” they wrote in a client note.

Citi analysts are surprised by the announced deal as they also felt ONEOK would pursue a natural gas or Permian-centric deal. Still, analysts said the metrics appear to work with the deal accretive.