Sunoco LP has agreed to acquire NuStar Energy LP in an all-stock transaction valued at $7.3 billion including debt, the companies announced Monday. The deal will expand Sunoco’s refined products pipeline network and retail fuel station footprint.
Key Details of the Deal
- Sunoco will acquire all of NuStar’s outstanding common units in an exchange ratio valued at 0.8987 Sunoco common units per NuStar unit
- This represents a 15% premium to NuStar’s closing price on Friday January 20th
- Post-acquisition, NuStar unitholders will own approximately 30% of the combined entity
- The transaction is expected to provide over $100 million in annual run-rate synergies within 24 months
- The deal has been unanimously approved by the boards of directors of both companies and is expected to close in Q2 2024
Sunoco President and CEO Karl Fails said: “This highly strategic combination provides an opportunity to expand our refined products pipeline and terminal footprint into fast-growing markets while enhancing exposure to high-quality retail assets across the country.”
NuStar CEO Brad Barron also highlighted the benefits of increased scale and diversification from combining the midstream and downstream franchises.
Expanded Network and Assets
The merger brings together two companies with complementary assets and operations in the refined products logistics value chain:
- Sunoco operates an approximately 5,000 mile refined products pipeline system, with terminalling facilities that support over 1,800 retail sites across 30 states
- NuStar has an oil pipeline and terminal footprint concentrated in major US energy hubs like Texas, with a focus on crude oil and refined products storage
After the acquisition, the merged entity will have over 15,000 miles of pipeline and storage capacity exceeding 100 million barrels. This expanded network enhances Sunoco’s capabilities in moving refined fuels to regional markets and supplying its retail gasoline stations.
Sunoco is also acquiring a 50% interest in two refined products pipelines between Texas and New Mexico that it previously held a minority stake in. This will provide fuller integration with its existing West Texas operations.
Enhanced Scale and Market Position
By combining their midstream transportation and terminal assets with Sunoco’s strength in fuel retail, the merged company hopes to capture additional cost and growth synergies.
| Combined Network Statistics | |
|---|---|
| Pipeline Miles | >15,000 miles |
| Refined Products Terminals | 28 |
| Crude Oil Terminals | 30 |
| Refined Products Storage Capacity | >60 million barrels |
| Crude Oil Storage Capacity | >40 million barrels |
| Retail Fuel Outlets | >1,800 |
Sunoco has been looking to strengthen its fuel supply logistics to support expansion into new geographies as well as cost competitiveness for retail gasoline and diesel sales. Meanwhile, NuStar’s growth opportunities had been constrained by its relatively small pipeline network size.
Industry analysts view the deal as largely complementary, with NuStar’s oil storage assets on the Gulf Coast fitting well with Sunoco’s supply operations across Central and North America. The combined size improves competitiveness with larger midstream rivals like MPLX and Buckeye Partners focused on refined products transport.
Integration Planning and Leadership
Current Sunoco CEO Karl Fails will remain CEO of the combined entity, highlighting Sunoco as the acquiring partner. The merged company will continue to trade under Sunoco’s existing ticker while transitioning to a new name that draws on both organizations. Headquarters will remain in Dallas, Texas where both partners are currently located.
In a call with investors, Fails said: “We have a clear path to integrate these two successful enterprises into an even stronger industry player. Leveraging the capabilities of our exceptional combined workforce, we expect to hit the ground running and realize substantial early achievements.”
The deal announcement also provided additional color on integration plans:
- Targeting $100+ million in commercial and cost synergy opportunities
- Optimization across the combined pipeline and terminal footprint
- Leverage expanded fuel supply network to enhance retail performance
- Streamline operations and overhead with integrated business processes
- Capital allocation strategy focused on deleveraging balance sheet
With a major acquisition such as this, executing on merger integration is vital to delivering stakeholder value from the deal rationale. Both partners have significant experience with prior deals – Sunoco with its 2017 conversion to a retail fuel C-Corp and NuStar’s public company operating history since 2006.
Remaining an MLP and Future Growth
Post-acquisition, the combined business will continue to operate as a publicly traded MLP, with distributions to unitholders continuing to benefit from pass-through tax treatment. However, achieving scale was likely necessary to compete more effectively with larger midstream C-Corps that have eaten into MLP market share.
While distribution coverage ratios may suffer in the near term as merger synergies are achieved, the deal ultimately provides a path to restart distribution growth from a more diversified base of cash flows. There is also greater capacity for self-funding expansion projects, reducing reliance on capital markets.
The larger size also provides a lower cost of capital for potential further acquisitions by the more integrated Sunoco/NuStar platform. However, management expects to focus over at least the next two years on extracting maximum value from this transaction rather than additional dealmaking.
Industry Consolidation Continuing
This transaction is the latest sign of consolidation in the midstream space as companies seek out synergies and scale. While no longer at the fever pitch of 2016-2018, mergers among MLPs and between MLPs and midstream corporations continue to shuffle assets and expand larger strategic networks.
Some of the tailwinds driving consolidation include:
- Advantages of scale and integration in competing for customer volumes
- Self-funding growth opportunities without reliance on external capital
- Mitigating risk by diversifying across more basins and products
Smaller MLPs have increasingly looked to mergers as the path to growth and sustainability, with NuStar seemingly following this playbook via the Sunoco deal. Its relatively small pipeline footprint was likely limiting competitive positioning.
For Sunoco, the price paid continues a string of expansions into new regions that leverage retail and marketing strengths – similar to its 2017 acquisition of 1,100 ETP fuel stations that geographically diversified its retail network.
So while overall midstream M&A activity has slowed over the past three years, this deal shows room remains for consolidation further down the value chain in logistics and infrastructure. Asset integration and new contracting opportunities across storage and transportation remain primary drivers.
Unitholder Approval and Anticipated Close
The transaction will require approval by unitholders of both companies, with votes expected during Sunoco and NuStar investor meetings in Q2 2024. Management expects the acquisition to officially close shortly following unitholder approval.
Given supportive commentary from both partner boards and management teams, shareholder approval is widely expected absent a superior proposal. The 15% acquisition premium and reasonable exchange ratio are also positive indicators for investor support.
However, the potential does exist for an interloper bid from another midstream company attracted to NuStar’s oil storage assets. The Go-Shop provision allows NuStar to solicit alternative proposals over the next 30 days. After that point, breakup fees would apply to any acquisition attempt outside the existing Sunoco deal.
Outlook for the Merged Company
Looking ahead, Sunoco management remains bullish on the opportunities for an expanded product delivery network integrated with retail fuel outlets. During recent years, the company has shifted emphasis and resources towards growing its non-fuel convenience retail business.
While fuel margins remain tight, higher margins on prepared foods and other convenience store products provide an offset. This strategy dovetails with NuStar’s oil pipelines and Gulf Coast terminal storage that serve similar end markets.
Combined with substantial synergies, the joint platform offers enhanced capabilities to serve customer base expansion in North America. There is also greater financial flexibility from the MLP structure even at a larger overall size.
However, executing complex integrations while maintaining operations poses its own risks if not managed carefully. Sunoco did achieve successful integration after its 2017 asset acquisition that provides a blueprint, but NuStar doubles that previous deal size.
Realizing stated synergies to improve credit metrics and restart distribution growth also depends on integration execution in a challenging economic environment. But with sound leadership and complementary assets, the Sunoco and NuStar combination has the right ingredients for success over the long term.
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