It’s not exactly an uncommon kind of transaction these days: General partner ONEOK (OKE) will acquire Master Limited Partnership ONEOK Partners (OKS) for $9.3 billion in stock. (For example, Targa Resources (TRGP) rolled up its MLP Targa Resources Partners this way in 2016.) The conversion rate is 0.985 shares of ONEOK (OKE) for each unit of ONEOK Partners (OKS) that it doesn’t currently own. (OKE owned 40% of OKS before this transaction.) That works out of a 22.4% premium to the closing price of ONEOK Partners on January 27, 2017 of $44.20. Units of ONEOK Partners closed at $54.40 on February 3. Shares of ONEOK (OKE), which traded at $54.91 on January 27, closed at $56.45 on February 3. The deal is expected to close in the second quarter of 2017 and once the deal is completed units of ONEOK will cease to trade publicly.
I hold ONEOK Partners in my Dividend Portfolio and the big question after a deal like this for me and any other income investors is what will the growth policy on dividends be after the rollout of the MLP. After all, master limited partnerships are structured as vehicles to pass through cash to unit holders at the highest possible rate with the maximum possible tax deferment. It’s not insignificant that OKS pays a yield of 6.11% as of February 3 and OKE pays a yield of just 4.56%.
ONEOK answered some of this questions when it announced its earnings guidance for 2017. OKE expects to increase its dividend by 21% in the first dividend after the deal closes and then to grow its dividend at an annual are of 9% to 11% after that through 2021. The annual distributable cash flow at OKE will approximately double after the acquisition of OKS, the company projects.
The only downside here that I can see is that the transaction will be a taxable event for owners of OKS.
I’m going to continue to hold OKS in my Dividend Portfolio until the acquisition closes and then I anticipate holding OKE in the portfolio.