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Plains Drops SEMG Acquisition Plan

Zacks Equity Research

Plains All American Pipeline LP (PAA) decided to back out from its decision to acquire SemGroup Corporation (SEMG). On October 6, 2011, the partnership had offered to purchase in cash all issued and outstanding Class A and Class B shares of SemGroup for $24.00 per share.

The Background

Per the terms of the proposed offer, the offer price of $24.00 per share reflected a premium of 16% to SemGroup's 10-day average closing price through October 5, 2011. The SemGroup board of directors rejected the offer on October 24, 2011 stating that the price does not fully accommodate the future prospects and undervalues the company. The offer price of $24 per share represented a 2% premium to SemGroup’s closing price of $23.56 per share on October 21, 2011.

Plains hoped that the shareholders of SemGroup might have a different take on the offer and hence made it official and public. The initial offer was made orally and in a letter addressed to the President and CEO of SemGroup.

However, the bid was rejected the second time by SemGroup on November 17, 2011, on grounds of opportunism and failing to address the true prospect of the company. Plains however stuck to its initial offering, which was $4.04 lower than SemGroup’s traded price on November 16, 2011.

SemGroup Profile

SemGroup Corporation is a diversified midstream company moving energy safely through a network of pipelines, terminals and storage tanks. The company has exposure in US, Mexico, Canada and United Kingdom.

SemGroup has recently entered into a partnership with a subsidiary of The Gavilon Group, LLC and an affiliate of Chesapeake Energy Corporation (CHK) to construct a 210-mile pipeline in north central Oklahoma. This pipeline will further enhance the prospects of the company meeting the growing needs in western Oklahoma and the Mississippi Lime play.

The strong performance of the company has boosted market sentiment as reflected in recent share price gains. The rejection of the Plains offer seems quite justified.

Reason for Withdrawal

Plains has been working on expanding its operations through acquisitions and its decision to acquire SemGroup is part of this strategy. Plains has completed the $1.67 billion acquisition of BP Plc.’s (BP) unit, BP Canada Energy Company, on April 1, 2012, and has issued debts as well as common units to fund the acquisition. SemGroup’s assets would have supplemented the existing systems of Plains All American.

The initial offer of $1.0 billion made on October 6, 2011, by Plains is clearly undervalued at present market rates. If we assume that the partnership will make an offer today to acquire SemGroup, with all conditions of the previous offer remaining the same (16% premium to SemGroup's 10-day average closing price through April 16, 2012), Plains has to cough out an additional $400 million to acquire SemGroup.

This would surely have been a financial burden for Plains and added to it are the risks of integration. Hence, Plains has prudently decided to end the chase for SemGroup.

Plains All American Pipeline currently retains a Zacks #1 Rank, which translates into a short-term Strong Buy rating.

Houston, Texas-based Plains All American is engaged in the transportation, storage, terminalling and marketing of crude oil, refined products and liquefied petroleum gas and other natural gas related petroleum products. The partnership is also involved in the development and operation of natural gas storage facilities.

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