SemGroup stock plummets as Moody's eyes merchant activity; United Online ups cash portion in FTD bid

By Paul A. Harris

St. Louis, July 17 - The master limited partnerships sector generated headline news on Thursday as the securities of SemGroup Energy Partners LP fell dramatically.

SemGroup stock (Nasdaq: SGLP) fell 51.75% on the day, down $11.80 per share, to close at $11.

The Tulsa-based midstream company's fixed income securities fell even more dramatically, with a bond trader spotting SemGroup's 8¾% notes maturing in 2015 at 22 bid, 28 offered, down over 70 points on the day.

Moody's downgrades SemGroup

Hard news that might explain these dramatic moves was in scarce supply at the close of trading and calls to SemGroup were not returned.

Market sources universally made mention of a bank meeting on Tuesday. However these sources were at a loss as to what the subject of that meeting was.

Meanwhile on Thursday Moody's Investors Service appeared to have a weather eye trained on SemGroup's merchant activity which, the ratings agency noted, represents a "large proportion" of the company's earnings.

In a move impacting approximately $2.95 billion of debt securities and credit facilities, Moody's downgraded SemGroup's corporate family rating two notches to B2 from Ba3, placing the company ratings under review for further downgrades.

"While SemGroup has been running an operationally sound business with attractive regional business niches and adequate hedged margins, in Moody's view the over 50% rise in sector oil prices since March 31, 2008 is likely to have pressured its liquidity position and highly volatile hydrocarbon prices would have been challenging to its hedged trading business."

Moody's anticipates SemGroup is facing "much higher funding needs" for hydrocarbon inventories and accounts receivables, as well as for "the posting of much higher cash margin deposits given that the rapid pace of price increase would yield market prices that exceed the prices of existing exchange traded hedges."

The ratings agency also commented that were SemGroup to breach its bank loan covenants, given present conditions in the debt, equity and commodity markets it could be difficult to obtain waivers, increase debt capacity and/or arrange alternative equity funding.

Moody's also noted that SemGroup's merchant activity is of a "highly working capital intensive, price sensitive, and market confidence sensitive nature" and added that surging oil, natural gas liquids, refined product, and natural gas markets consumed virtually all of the company's cash flow after capital spending in first half 2006.

Sandell sounds off on Southern Union performance

Elsewhere in news bearing upon master limited partnerships, on Thursday Sandell Asset Management Corp., the largest individual shareholder of Southern Union Co., announced that it sent a letter to George Lindemann, chairman and CEO of Southern Union, expressing "serious concern regarding management's and the board's failure to achieve the goals of its 2007 strategic plan, which was the basis for Sandell agreeing to withdraw its nominees for the company's board at the 2006 annual stockholders meeting."

Sandell, which owns 9.9% of Southern Union's outstanding shares, identifies "this lack of action" by the company as the driver of its continued poor stock price performance on both an absolute and relative basis.

That plan specifically stated goals of forming an MLP by the end of the third quarter of 2007 and an increased focus on return of capital to shareholders.

Tom Sandell, the CEO of Sandell Asset Management, stated: "We have been holders of Southern Union for over three years now and took management at their word that they would take action to enhance shareholder value.

"Our patience has not been rewarded and we, along with other shareholders have witnessed a consistent record of underperformance and complacency toward shareholder value.

"Our research indicates that these shares should be worth at least $32 per share and likely greater than $40 per share in the hands of a qualified, appropriately motivated team dedicated to driving value. We believe that our fellow shareholders share our frustration and we will continue to seek whatever changes are necessary to realize full value for this impressive collection of assets."

On Thursday shares of Southern Union (NYSE: SUG) gained 2.55%, or $0.64 per share, to close at $25.77, still well below the thresholds specified by Tom Sandell.

MLP window is closed

Gordon Howald, a Calyon Securities stock analyst who covers Southern Union, told Prospect News that although the company has attempted to create shareholder value the window on forming MLPs has closed for the time being.

Hence Southern Union's stock has languished below its peers, Howald said.

"The Lindemanns, including chairman and CEO George Lindemann, are the largest collective shareholder of Southern Union," the analyst noted.

"They have skin in the game.

"They certainly have shareholders' interests at heart.

"However their time frame could be a little different from that of Sandell."

More cash in bid for FTD

Away from the MLP sector on Thursday, United Online, Inc. and FTD Group, Inc. amended their merger agreement as United Online obtained additional financing for the deal in the form of a $60 million term loan.

As a result United Online has increased the cash portion of the merger by $2.81 per share.

FTD stockholders will receive a total of $10.15 in cash and 0.4087 of a share of United Online stock in exchange for each share of FTD, for a total value of $14.38 per share based on United Online's Wednesday closing stock price of $10.35.

Given that price the total consideration to FTD stockholders and option holders would be approximately $434 million, consisting of approximately $307 million in cash and approximately 12.35 million United Online shares.

Troy Mastin, a stock analyst for William Blair & Co., LLC, which makes markets in FTD Group, recommended the merger as a trading opportunity.

In a Wednesday comment, he wrote that United Online successfully secured a commitment from Silicon Valley Bank for a $60 million senior secured term loan, which should provide sufficient cash to fund the total $307 million of cash needed for the transaction.

The financing is at Libor plus 350 basis points, with a Libor floor of 3%.

"In the unlikely event that that the $60 million term loan is unavailable to United Online, consideration to FTD shareholders will revert back to the original deal comprised of 0.4087 of a share of UNTD stock, $7.34 in cash, and $3.31 of 13% senior secured notes," Mastin wrote.

"We believe that the only remaining step necessary before effecting this transaction is word back from the SEC, which we expect will come shortly with little or no feedback regarding the deal.

"Based on July 16 closing prices, the current spread stands at 6.4%, which we view as somewhat high given the added valuation clarity provided by the announcement this morning and the likelihood that the transaction will close in the next month or so.

"We view shares of FTD as offering an interesting short-term trading opportunity."

Shares of FTD (NYSE: FTD) gained 2.89% on Thursday to close at $13.90, up $0.39 on the day.

Meanwhile United Online (Nasdaq: UNTD) ended the day 0.48%, or a nickel, higher, and closed at $10.40.

Thursday's situations unfolded against a backdrop of smartly rallying stock prices, as reflected in the major U.S. indexes.

The Dow Jones Industrial Average enjoyed the biggest percentage move, up 1.85%, or 207.38 points, to close at 11,446.66.

Both the Nasdaq and the S&P 500 gained 1.2% on the day.

The Nasdaq gained 27.45 points to close at 2,312.30.

The S&P 500 gained 14.96 points, and closed at 1,260.32.

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