Magellan Midstream makes stalking horse bid for Longhorn; NRG/Exelon merger debate rages on

By Stephanie N. Rotondo

Portland, Ore., June 19 - Magellan Midstream Partners LP announced Friday that it filed the stalking horse bid for Flying J subsidiary Longhorn Partners Pipeline LP.

Magellan made a $340 million bid for the asset being sold at auction. The proposal comes just days after the company cut its second-quarter and full-year earnings guidance.

The debate rages on for NRG Energy Inc. and Exelon Corp. Exelon is continuing to push its hostile bid on NRG stockholders while NRG's board remains steadfastly against the takeover. Even analysts are mixed on whether or not the deal will ever come to fruition.

In equities, the Dow Jones Industrial Average fell behind, losing 15.87 points, or 0.19%, to close at 8,539.73 while the Nasdaq Composite gained 19.75 points, or 1.09%, to 1,827,47. The Standard & Poor's 500 index inched up 2.86 points, or 0.31%, to 921.23.

Magellan's Longhorn bid

Magellan has won the stalking horse bid for nearly all assets of Longhorn Partners Pipeline, according to a press release.

Magellan must acquire the assets through auction, as Longhorn is currently operating in bankruptcy.

The assets include a 700-mile common carrier pipeline system that transports refined petroleum products to El Paso from Houston. The deal also includes a five-bay truck-loading rack and more than 900,000 barrels of storage at the El Paso terminal.

Magellan is currently the operator of the system.

Magellan's bid came in at $250 million plus the fair market value of line fill, which is currently valued around $90 million.

The company plans to issue new debt to fund the transaction.

Earlier in the week, Magellan cut its second-quarter earnings outlook, as higher petroleum prices resulted in mark-to-market losses.

For the quarter ending June 30, Magellan expects to post earnings of 30 cents per unit, down from expectations of 63 cents per unit previously.

Full-year guidance was cut to $2.50 per unit from $2.60.

"Despite the accounting adjustments related to our commodity hedges that impact net income, the net sales margin we will ultimately earn from the underlying physical activities is very favorable," Don Wellendorf, chief executive officer, said in a statement.

Magellan's equity gained 11 cents, or 0.33%, to $33.50. The Tulsa-based partnership operates a portfolio of energy assets.

Will NRG prevail?

The NRG/Exelon combination continues to spark debate among market players as to whether the deal will ever actually happen. Both companies have pleaded their respective cases and now shareholders are faced with a dilemma: To tender or not to tender?

On Wednesday, Exelon extended for the third time the deadline on its tender offer for NRG shares. The company is looking to get 51% of the shares, but as of Wednesday, only 12% had been tendered.

In a letter attached to its preliminary proxy statement, Exelon said to NRG shareholders that "Exelon is offering you the opportunity to realize an immediate premium for your NRG shares as well as the opportunity to participate in the upside of an Exelon-NRG combination."

Exelon has offered NRG stockholders 0.485 shares of Exelon equity for every one NRG share tendered. That represented a 37% premium over NRG's closing price on Oct. 17, 2008. Since then, Exelon has not increased its bid, though NRG has thus far rejected any takeover proposals.

"While the recent increase in NRG's share price puts pressure on Exelon to raise its bid, its ability to do so is constrained by the likely need to issue $1.0 billion of equity following the acquisition to pay down debt and sustain its investment grade rating," wrote Hugh Wynn, an analyst with Bernstein Research, in a June 10 note.

Others believe that Exelon will throw caution to the wind and go for it.

"Ultimately, money talks and something else walks," said Lasan Johong, analyst with RBC Capital Markets, in a note to clients late Wednesday. "We believe that Exelon's success or failure in winning over NRG shareholders will depend on how high its exchange ratio goes."

Also, Johong noted, though NRG is steadfastly committed to remaining independent, "we believe that Exelon will eventually prevail."

Not everyone agrees, however.

"The equity merger arbitrage was 23.53% [on Tuesday], and we remain skeptical this merger will happen (although our high yield colleague, Carl Blake, disagrees)," wrote Gimme Credit analyst Philip C Adams in a comment posted Wednesday.

Carl Blake could not be reached for comment.

The board of Exelon, a Chicago-based electric company, will reconsider the offer at a meeting on June 30. Stockholders of NRG, a Princeton, N.J.-based power generation company, will vote on the deal on July 21.

Exelon's stock fell 52 cents, or 1.03%, to $49.94, as NRG's rose 12 cents, or 0.51%, to $23.82.

Mentioned in this article:

Exelon Corp. NYSE: EXC

Magellan Midstream Partners LP NYSE: MMP

NRG Energy Inc. NYSE: NRG

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