Our Oldest Holding Is Up 559% — Here’s Why The Gains May Not Be Over…

First Store Capital. Then Triton. And now Magellan.

If you haven’t heard the news, Oneok (NYSE: OKE) has just extended a massive $18.8 billion takeover offer for Magellan Midstream Partners (NYSE: MMP).

We’ve seen a number of holdings in our High-Yield Investing portfolio get takeover offers for rich premiums. This is the third portfolio member to be targeted for acquisition in just the past 12 months.

But this one just hits a little bit different. Let me explain…

The End Of An Era…

Magellan is truly one of the world’s most elite businesses, with an irreplaceable set of fee-earning energy infrastructure assets. If you pumped gasoline this week, there’s a good chance that Magellan helped make it possible.

The company owns 9,700 miles of refined product pipelines that connect with roughly half of the nation’s refineries. It also operates 53 terminals that boast 100 million barrels of storage capacity. That’s in addition to 2,200 miles of crude oil pipelines along that feed storage systems from the Gulf Coast to the nation’s main hub in Cushing, Oklahoma.

This “Lifetime Wealth Generator” is our oldest holding, first being added to the portfolio in 2005. Why sell? This all-weather cash machine has raised distributions 58 times since then — quadrupling the annual payout from $1.10 to the current $4.19 per share.

Now THAT is how you stay ahead of inflation.

Oneok is no stranger to us either. The company — a massive player in the processing, storage, and transportation of natural gas liquids (NGLs) — was also a former HYI recommendation. We sold the stock in 2021 for a nice 123.3% gain.

A New Era Begins

The combination of these two market leaders will create a $60 billion midstream giant with 25,000 miles of liquids pipelines and an unrivaled collection of complementary systems and networks stretching from the Gulf Coast to the Rocky Mountains. The deal is expected to yield hundreds of millions in annual operating and cost-savings synergies, resulting in 20% or better free cash flow per share accretion over the next few years.

Both companies maintain investment-grade balance sheets, and management expects the union to deleverage the balance sheet to a healthy net debt/EBITDA of 3.5 once new projects are brought online. In the meantime, the board has pledged to return the bulk of its cash flow to shareholders and is aiming for a dividend payout ratio of 85%.

Based on pro-forma cash flows, the yield will likely be in the 7% neighborhood.

As for the terms, MMP investors are set to receive $25 per share in cash and .667 OKE shares for each MMP-owned share. That implies a total consideration of $67.50 per unit – a generous premium of 22%. As you would expect, MMP immediately vaulted higher on the news.

Action To Take

We will dive into the nuts and bolts of this transaction in due course. As with any merger, there will be integration challenges, but I believe the potential rewards easily outweigh the risks.

Normally, I say take the money and run after an offer like this, particularly a cash/stock bid in which the ultimate proceeds are tied to the performance of the acquirer and thus subject to fluctuation. But I’m inclined to stick around this time.

Over at High-Yield Investing, Magellan has given us a 559% return thus far – and it may not be done yet. Added scale and other advantages from this merger will create a fee-based juggernaut with superior returns on capital.

I plan to continue holding MMP through completion but will advise my premium subscribers if anything changes. Both boards have blessed the deal, which is expected to close next quarter.

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