Several things about Longhorn concern me. First, they have been predicting that eventually it will get down to a 8x-9x multiple. 8x-9x isn't a fabulous multiple (again this is from memory). Now granted, MMP management may be low balling which is fine by me. The other issue is whether that multiple takes into account the $100 million in line fill or is based on the purchase price of $250 million.
In many ways, it isn't material as the pipeline isn't profitable yet and MMP has a low cost of capital.
MMP IR said the multiple is for the pipeline. It does not count the line fill. What is strange is that Longhorn was on the books at about $450M if my memory is correct and now MMP is hoping to get to a 8X or 9X multiple. What I forgot to ask and what the problem might be is that the maximum FERC rate of return on an oil pipe is limited first because MMP allows Roth holders and again possibly because was the rate was reset to the new purchase price? I personally do not see the fit to MMP.
In the old days (2000 or so) assets were sold for a 6X multiple and organic projects built for less. Now assets are bought (by my terrible memory) in the 10X area. Problem is this was an empty asset. Guess the good part is they filled it under $60!
Your reference to purchases at 10x is why I look for the MLPs that have GPs with long term plans to do drop downs at much lower multiples.
The recent WPZ dropdown from their GP was at 7x which is incredibly favorable. Not only that the GP took 100% WPZ shares meaning no forced capital raise for a significant drop down of first rate pipeline assets.
WPZ is supposed to get WMZ assets later this year for what I hope will be a similar discounted multiple and a straight trade of shares between the two....
The open market valuations are too high and thus we are seeing little to no consolidation. The only significant deal was EPD buying Teppco and that is going to be a great long term core holding.
IMO the smart MLP mgmt teams are looking for organic growth in 2010 because M&A is not going to work in this environment where there is little to no distress and sellers are commanding and demanding premiums for pipeline assets.
I say look for the asset drop downs for big wins. I bought big into NGLS on a Citi report that a big asset dropdown was coming and now I have yields of 15% to cost on my investment there. Not only that the dropdown from their GP was so favorable they reported q4 earnings beat of $0.18/share.
Finally, EVEP has a great GP that is dropping down production (not pipeline) assets and that makes them one of the best E&P plays out there if you want some exposure to commodity risk in an MLP.