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TransMontaigne, Inc. (TMG) Message Board

  • rrb1981 rrb1981 Oct 2, 2004 1:52 PM Flag

    MLP spin

    The real question remains, what avenue will they use to float the MLP? Do they IPO roughly 30% of the MLP and then hold the remaining portion, which has been a popular method for many of the GP's to float the MLP. They could also distribute a portion of the MLP units to existing TMG shareholders on a set ratio, for example 1 MLP unit for every 10 TMG shares order to give the new MLP a higher price so as to make it an attractive currency for future acquisitons.

    I think most don't understand that when the deal is completed, there will be (2) Transmontaigne companies, one of them will be the General Partner, and one will be the Master Limited Partnership (MLP). The GP runs the MLP and receives a fee, known as the incentive distribution rights, to manage the MLP. As the MLP grows its distribution, the fee increases, not just in nominal terms, but also in percentage terms.

    The next question is this: After separation, what kind of free cash flow( i.e. distributable cash flow) will the MLP have. Yahoo, lists TMG with 51 million in fcf for the last 12 months(again I do not know how they calculate fcf and if it takes into account a myriad of things like debt service etc). I doubt that the 51 million number is accurate although the fcf/ev is close to 10 so it may indeed be accurate. One can value the MLP based loosely on the range of multiples that the rest of the midstream MLP's trade at. For the sake of simplicity, the average distribution multiple is around 14.0x, which equates to roughly a 7% yield. So if they have, for example, 25 million in distributable cash flow, then the MLP would be valued(market cap, not enterprise value) at roughly 350 million, with the GP holding the trading book, non MLPable assets, the incentive distribution rights. These GP assets will also need to be valued...

    When the numbers are crunched, it looks, at least on the surface to me, that TMG is a classic "sum of the parts is worth more than the whole" play. Essentially they are arbiraging the difference in the private market and public market values for midstream assets. If MLP's can buy assets at 7x-8x ebitda, which is typically 8x-9x cf, and then float units at 14x cf, they can capture the spread and the deal is accretive...the bottom line is this: what is the true, free cash flow at TMG that is sustainable (e.g. not drastically affected by the flucutations of oil). After looking over the numbers, the hidden value could be as much as $2.00-$3.00 per share.

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    • Board is dead lately. Any guesses on when MLP spin-off takes place? My guess is 1st Q 05.

      • 2 Replies to rrb1981
      • Nothing will happen until calendar year 2005, and it may not happen early in the year either. These things take a long time because of corporate reorganization and tax issues. This isn't simply a spin-off because there is nothing to spin until TMG creates separate companies. They also may need a tax opinion from the IRS which takes months from the time they request it, and they surely haven't requested it yet. We will get a timetable, I'm sure, on the next quarterly call in mid-November. Hopefully they will begin reporting pro forma numbers soon, including a target initial distribution for the MLP piece, so that we will have an idea what the new structure will look like.

      • Board is dead.....although it never was very active until news of the current situation surfaced.

        No idea on my part when the MLP transaction will take place. If there are no tax benefits to getting it done this year, I agree it will take place in Q1 of '05.

        Your post earlier regarding the MLP...the potential value etc was helpful. I know little about the valuation/set-up etc of these kinds of things although I do have one other in the sector, Kaneb Services which has appreciated nicely and continues to spin off a nice cash flow. Interest rates do appear to impact the share price, however.

        Good luck,