you will get the 1.07 times units cmlp current units; but at nrgm distribution rate of 1.58 unit (current) vs cmlp rate of 2.04 (current), which in my calculation it will take 3 years to make up the difference between 1.58 and 2.04 (with no growth) at a roughly 10% distribution growth post merger and the $1.03 per unit makes up for around 2.8 years npv of lower quarterly distributions from nrgm. if distributions grow at 10% then the 1.03 is okay. if distributions grow at 6% then the npv distribution shortfall starts becomes difficult to overcome.
what lost quarterly distribution? I'm not aware of missing any distribution during the merger process.
are cmlp unit holders not also getting $1.03 in cash for each unit held by middle of June to offset lost quarterly distribution
With the caveat that beauty is in the eye of the beholder and large to me is puny to you apparently , I will offer that 5-6% for three months is 20-24% annually, and 1 year Libor is about 100 bps. I am quite happy with returns on some investments of less than 1/2 that, so it seems to be quite outsized, yes.
Is it that large?
CMLP = 24.70
NRGM = 23.34
Apply the 1.07 conversion to NRGM gives
23.34 + 1.07 = 24.97
and add the 1.03 cash component = $26
So the current discount is about 5% (24.70 versus 26)
Not sure whether NRGY has anything to drop down. They may - I haven't followed NRGY closely, but wasn't aware of anything.
"you get to the same place approximately in 3 years time."
And we already calculated that the $1.03 cash component compensates for 3 years of the distributions different - not sure if that is intended - except that if it's taxed as ordinary income I have to pay almost half in tax.
We'll see what the distribution growth rates are like. NRGM's recent history of .005/qtr equates to about 5% per year, while CMLP is hard to say as they were growing quite fast from 2010-12 but slowed down to a crawl over the last year. I guess 6% versus 1% may be not far off the recent history.
My point was not so much correlation as it was, if I hold for maybe three months I get a substantial amount more, and a number which is way more than the time value of money. I dont foresee any Hart Scott Rodino risks to the deal going through, so it seems strange to me that the haircut is that large.
They have a similar price NOW, however they went in different directions after the merger announcement and that explains your confusion when you were trying to correlate movement of CMLP with NRGY rather than NRGM.
If you do a 5 day chart of all 3 tickers, you can see that since the announcement NRGM is down a little over 5%, NRGY is up almost 10% and CMLP was up 7-8% immediately following the announcement (before NRGM started to drop), but has drifted down to be up only 3-4% now following the decline of NRGM.
NRGM was down almost 10% at one point (the morning of 5/8) and that also marked the post-announcement low of CMLP.
So the price of CMLP has indeed correlated as expected if you had been following the right ticker.
As for post upgrade performance, the reaction of NRGY is understandable (for reasons discussed in other posts - the IDR structure means the merger will result in greater cash flow to the parent) and CMLP has tracked as expected with the acquirer (NRGM). Only thing I am not sure about is the decline in NRGM which could be reaction to the merger but also could be due to disappointing earnings they announced at the same time.
Just doing the math of 6% annually on the new and lower distribution versus 1% on the old and higher distribution, you get to the same place approximately in 3 years time. I.E. distribution recovers to what the old distribution would have been with current expected growth. Given 6% is the low end of mgt's range, and 10% is the high end, I think it likely that MGT expects to well exceed 6% in the near term. As you correctly point out, the IDRs will drive the GP to drop down anything and everything they can as they are already in the top sharing %.
NRGY is now a midstream. It sold the propane business last year.
NRGM will now be an integrated midstream (CMLP's G&P operations plus its existing pipe and storgae assets) and NRGY is the GP.
Propane is history
Furthermore NRGY has a usurious IDR arrangement where it went straight into the 50% IDR tier after the first distribution. So NRGY is highly leveraged to growth at NRGM (and now CMLP).
Which means distribution growth at NRGY is likely to be faster and that is probably why NRGY rallied on this deal and NRGM dropped.
NRGY has made a very quick complete transformation of the entire company. Just a year ago it was the propane dinosaur you suggest. No more.
WF Advisors take this AM:
As noted, we view the merger as a net positive for CMLP unitholders. The transaction provides
(1) an enhanced set of midstream logistics assets (storage, pipeline, NGL logistics);
(2) further scale, geographic diversification, and a larger platform from which to
pursue additional organic and acquisition related growth, and
(3) an enhanced distribution growth profile. NRGM management reiterated the partnership’s
ability to grow its distribution by 6-10% annually over the next two years, proforma for the merger (which compares to our current CMLP 2013-2014distribution growth forecast of 1.2% an
d 1.7%, respectively). In our view, the primary negative of the transaction for
CMLP unitholders is a reduction in the absolute level of distributions (from the
current $2.04 annualized to $1.76 post closing). The offset (or tradeoff) is that
CMLP unitholders will now own a larger, more diversified, lower-risk MLP with an enhanced growth profile.
Good point! But, it does not may a hell of a lot of difference, I get using the exact same analysis $26.13 ( instead of $26.55 ). I would much rather have the midstream company as the propane dinosaur as well.
I would think so too, however the merger announcements did not address this point at all so I raised the question here.