TheChek News Flow

* Take-private deals likely

* Diverse pool of hopeful bidders for assets

* Corporate M&A needs market stability first

Facing challenging commodity prices and volatile capital markets, midstream master limited partnerships (MLPs) will turn to mergers, divestitures and ultimately acquisitions to address capital needs or simply to survive, industry sources say.

“The world doesn’t need 112 MLPs,” said Peter Bowden, managing director and head of midstream/MLPs, for Jefferies, speaking on 18 February at the Infocast 10th Annual Midstream Conference in Houston. Some will likely fail while others will be consolidated, he said. High-quality MLPs with strong sponsors will be the most likely acquirers, he said.

Generous capital markets enabled anyone “who could spell MLP” to raise capital, joked Jim Teague, CEO of Enterprise Products (NYSE:EPD), speaking on a panel at IHS CERAWeek in Houston last week. Enterprise is not looking to consolidate, Teague clarified.

Other executives take a different view. Consolidation could help resolve the current overbuilding and underutilization plaguing midstream infrastructure, said Greg Armstrong, CEO of Plains GP Holding (NYSE:PAGP) and Plains All American (NYSE:PAA), speaking on the same CERAWeek panel.

The MLP space will likely see “massive consolidation” between MLPs or take-backs to the parent, said Gregory Ebel, chairman, president and CEO of Spectra Energy (NYSE:SE) and Spectra Energy Partners (NYSE:SEP), also speaking during CERAWeek.

In August, Spectra was pegged as a potential suitor for Williams Companies (NYSE:WMB), which is in the process of being acquired by Energy Transfer Equity (NYSE:ETE).

To be sure, MLPs will look at all their financing options before parting with assets or consenting to a sale. On 27 January, Mergermarket outlined some of the capital-raising alternatives for MLPs, such as cutting distributions, securing financing from sponsors or selling preferred equity. An increasing number of MLPs are running out of options, however, and could become targets.

Potential sellers include MLPs that are struggling to survive in the current environment. Southcross Energy (NYSE:SXE) has seen its shares fall more than 96% from their 52-week high. Its market cap stands at USD 37.5m. Ownership of Southcross’s general partner is roughly divided between three private equity firms: Charlesbank Capital Partners, EIG Global Energy Partners and Tailwater Capital, according to regulatory filings.

Southcross is just one of as many as 20 MLPs that could “end up on the pink sheets,” said a first industry investor. The company received a continued listing notice on 19 February for trading below USD 1 over the preceding 30 trading-day period. The company has six months to regain compliance.

Beaten-down MLPs unable to tap the equity or debt markets could become “zombie” MLPs that are unable to execute their business strategy, said the industry investor and a first sector advisor.

Take-private plays

MLPs that can no longer serve the function they were created for could be potential take-private candidates, said Hinds Howard, SVP and associate portfolio manager at CBRE Clarion. In 2009, the Bakken-focused MLP Hiland Partners was taken private by Harold Hamm, also owner of Continental Resources (NYSE: CLR).

Ownership of the general partner will be key to any MLP take-private strategy, said Jeff Jorgensen, SVP, Center Coast Capital, noting that Hamm owned the GP of Hiland Partners himself.

A private equity executive and second sector advisor agreed that the current market creates take-private opportunities. The second sector advisor added that reverse mergers would be the flip side of the same coin.

In that case, a weakened public MLP could be a takeover target for a strong private company that would lead to a merged entity with a higher public valuation “over time.”

The first sector advisor said that most of the PE sponsors that own general partners that own MLPs have already looked at take-private scenarios. While the math “would seem to work”, factoring in the costs of taking the company private and then taking it public again at a later date means “it’s just as cheap if not cheaper to just wait it out,” the first sector advisor said.

Asset sale option

Public MLP valuations have fallen drastically — the Alerian MLP Index is down 45% from its 52-week high. But valuations for underlying midstream assets themselves remain relatively attractive, sources say. MLPs willing to part with assets will find a ready pool of buyers.

Canadian pension funds, sovereign wealth funds and even Asian investors would like to buy North American infrastructure, said the second sector advisor.

Mergermarket reported on 5 February that private equity stands by as willing buyers and partners. On 19 February, this news service also reported that utilities are targeting MLPs, and hungry for acquisitions.

MLPs themselves could be both buyers and sellers of assets. In July 2015, Enterprise Products sold its offshore Gulf of Mexico system to Genesis Energy (NYSE:GEL) for USD 1.5bn while purchasing midstream gathering assets in the Eagle Ford from upstream producers Reliance and Pioneer Natural Resources (NYSE:PXD).

Enterprise’s willingness to sell assets is one reason the company has weathered the current storm better than other MLPs, said Aaron Blomquist, managing director, Tudor Pickering Holt, speaking during the Infocast 10th Annual Midstream Summit on 18 February.

Corporate deals coming later

With public market valuations down and capital markets closed, undertaking an acquisition would present challenges to most MLPs. In addition, investor sentiment is an obstacle as investors have punished risk-takers, including Energy Transfer Equity in its bid to acquire Williams Companies.

Unit valuations for Energy Transfer Equity are down 69% and Williams Companies are down 59% since the deal was first announced.

Deals will not likely begin to happen until there is greater stability in the MLP markets, said Hugh Babowal, managing director of energy M&A, Wells Fargo Securities, speaking at the Infocast 10th Annual Midstream Summit. Standard volatility for the S&P 500 is about 1-2% per day, while the Alerian Index has seen many days with volatility as high as 10%, he said. Until volatility flattens out and stock valuations improve, “it’s difficult for boards to stick their necks out,” he said.

Plains All American’s Armstrong asserted that the next 120 days will be the “most painful” the MLP has experienced in the last 30 years, but that the industry should begin to recover after that, and was hopeful consolidation would help play a role in that recovery.

Why is miner and commodity trader Glencore trying to sell a large stake in its agricultural business? The obvious answer is to pay down debts, which at the end of last year stood at nearly $26bn. But there are other factors at play.

Through its $4.8bn acquisition of Canadian grain handler Viterra in 2012, Glencore has emerged as a major player in agriculture, handling 44m tonnes of grain last year. But to be considered a truly global player it needs to bulk up in South America and the US — two of the world’s most important food markets.

This is where a partner comes in. Joining forces with a strategic investor, most likely a group of sovereign wealth funds, would give Glencore the firepower to make acquisitions in the Americas. Glencore is targeting a sale of between 30-49 per cent, which JPMorgan says could raise up to $3.9bn.

“To grow in that business, you’re going to need more financial muscle,” Glencore’s chief executive Ivan Glasenberg told analysts after the company reported annual results earlier this week

“It’s clear it’s time to bring in a partner, like we did when I first expanded the coal business in Colombia,” he said, referring to the deal he struck with rival mining companies to jointly acquire Cerrejón, a major field in the South American country.

So what could Glencore look to purchase?

The industry’s four biggest players — Archer Daniels Midland, Bunge, Cargill and Louis Dreyfus Commodities — are probably beyond its reach for a number of reasons. Some are too big, others are wedded to remaining private. That leaves mid tier companies.

Previous reports have linked Glencore with a bid for The Andersons, an $800m Nasdaq-listed company based in Ohio. Scoular Co and Lansing Trade Group, both privately-held companies, have also been mentioned as possible targets.

But the strong US dollar has made exports from the US increasingly uncompetitive. Relatively high prices over the past decade have also led to increased production, leaving the US market oversupplied.

So for now, Glencore might look to South America and Brazil, the world’s biggest exporter of soyabeans. Indeed, Glencore’s most recent deal in agriculture was the purchase of a 50 per cent stake in an export terminal in Brazil from ADM.

“It’s quite clear that there is going to be a period of some industry consolidation coming up there and you don’t want to miss out on that,” said Glencore’s chief financial officer Steven Kalmin after the results.

But before Glencore can buy anything it needs to complete the sale of a significant minority stake for an acceptable price. Some analysts say that this could be a challenge because it is a buyer’s market at the moment. After a bumper year in 2014, adjusted earnings from Glencore’s agriculture division fell 48 per cent to $542m last year.

But Mr Glasenberg does not appear to be worried.

“We have strong interest in the ag business,” he told analysts on Tuesday. “We’re dealing with various companies and I feel very confident we will have that sale concluded definitely before the first half of this year.

	rate	10 days ago	2 days after	5 days	10 days
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20140206	0.25%	-0.57	0.92	2.79	3.65
20140306	0.25%	0.41	-1.57	-2.51	-2.17
20140403	0.25%	3.56	0.74	-0.75	-2.10
20140508	0.25%	1.81	-0.63	0.19	-0.54
20140605	0.15%	1.99	0.83	0.67	0.37
20140703	0.15%	-0.38	-0.59	-2.63	-2.64
20140807	0.15%	-5.11	-0.20	1.44	2.34
20140904	0.05%	5.77	-0.06	-1.01	-1.21
20141002	0.05%	-5.10	0.87	-1.71	-6.88
20141106	0.05%	2.37	-1.20	-1.77	0.68
20141204	0.05%	-0.09	2.70	-1.26	-4.36

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HERZOGENAURACH, Germany— Kasper Rorsted spent the past year hawking German laundry detergent to American shoppers. Now Adidas AG thinks he can help the sportswear company get its U.S. game back.

Mr. Rorsted, the departing chief executive of consumer-products giant Henkel AG, a year ago scored a marketing coup when Wal-Mart Stores Inc. agreed to stock Henkel’s European best seller, premium-priced Persil laundry detergent, next to Procter & Gamble Co.’s Tide.

The sports-obsessed Dane’s recent naming as the next boss of Adidas sparked hope among investors of similar wins to come for the faded icon. Adidas’s share price jumped 6% on the day of the announcement.

“The U.S. mentality, which is a bit more competitive (than the European), was set in me at an early age,” said Mr. Rorsted in a recent interview. As a teenager, he attended sports summer camps in the U.S. He held senior positions at American tech firms Compaq and Hewlett-Packard and attended executive programs at Harvard Business School. While leading Henkel he visited the U.S. at least monthly.

Adidas on Thursday reported its best results in years, recovering from weakened sales and profits in 2013 and 2014. The company posted a 2015 net profit of €634 million ($689 million), up 29% from the year before. Its full-year sales rose 16% to €17 billion.

But some analysts worry the upswing is more a sign of health in the broader sportswear industry than a turnaround at Adidas. This summer’s Olympic Games and UEFA European soccer championship have boosted wholesale demand for Adidas products, but analysts question whether retail demand will follow.

This could force Mr. Rorsted to reset some of Adidas’s short-term targets, said John Guy, an analyst at Mainfirst Bank.

Longer term, Adidas has been losing market share in its core Western European market, and analysts expect its margins to suffer from the dollar’s strength against the euro and rising costs for raw materials and labor.

Adidas has fallen to third place in North America—the world’s biggest and most influential sporting-goods market—losing out to competitors Nike Inc. and Under Armour Inc. Its turnaround efforts have so far yielded only modest results.

The situation at Henkel during Mr. Rorsted’s eight years is almost the inverse. Its stock price has tripled as its sales and profits improved. Bigger rivals including Procter & Gamble and Unilever PLC have posted weaker growth over the period.

Mr. Rorsted has become a star of the Frankfurt DAX-30 blue chip index. Research firm Unicepta in 2014 said media coverage suggested he had the best image among DAX CEOs that year.

Investors believe Mr. Rorsted’s Henkel approach—cutting costs, shaking up hierarchies and giving an old-line company a Silicon Valley ethos—could turn around the famed but wavering sportswear company.

“He is like an American CEO in Germany,” said Mr. Guy. “Let’s hope he can de-layer some of the fat that has built up in Adidas.”

Mr. Rorsted needs to cut costs and boost efficiency while addressing whether Adidas’s brands can recover in North America, analysts say.

“Adidas wants to close the margin gap with Nike,” said Berenberg analyst Zuzanna Pusz. Mr. Rorsted “may have what Adidas needs, although it looks like a pretty tough job.”

When taking over as Henkel’s CEO in 2008, Mr. Rorsted announced a margin-improvement target that many company insiders and analysts thought was unattainable. Almost immediately, the global financial crisis hit.

Instead of scrapping the targets, Mr. Rorsted pledged to double managers’ bonuses if Henkel reached his goals.

“At the time it felt incredibly tough, and he didn’t even know what the exact steps were to get there,” said Ian Parish, a former Henkel manager who worked closely with Mr. Rorsted until last spring.

Mr. Rorsted said his first months at Henkel were particularly trying because he had to make controversial decisions without a track record to justify them. He started culling the company’s stable of more than 1,000 beauty-care, home-care, and adhesives brands, killing lines seen as having little growth potential. During his tenure, he shed 80% of them.

To cut costs, he fired thousands of employees, streamlined operations and opened back-office centers abroad. He also adopted a new appraisal system for managers, modeled on General Electric Co.’s reviews, that promoted and rewarded top performers.

“His mission was higher-higher, faster-faster,” said Jens Plinke, a former Henkel manager. Mr. Plinke said some employees, accustomed to positive feedback and Henkel’s traditionally egalitarian approach, bristled at the sudden changes. Several decided to leave, he said.

In 2012, Henkel announced it had reached all Mr. Rorsted’s targets.

In 2014, after the company’s U.S. sales slumped, Mr. Rorsted launched a major overhaul of its business there. He replaced 80% of Henkel’s North American managers and acquired several businesses to strengthen its market position.

Henkel last month reported its best yearly results ever, despite global headwinds. Its North American sales were up 2.3%.