Crestwood Equity Partners LP (CEQP) and Crestwood Midstream Partners LP (CMLP) aim to merge into a single company with an enterprise value of $7.5 billion, the companies said May 6.

The combination seeks to simplify their corporate structure. The new company will be a single, publicly-traded partnership. The deal has been approved and signed by the board. Crestwood Equity owns Crestwood Midstream’s general partner.

Under the terms of the merger, CMLP unitholders would receive 2.75 units of CEQP per unit of CMLP held, or about $18.37, a 17% premium to CMLP's closing price of $6.68 on May 5.

Crestwood Holdings LLC will continue to own the general partner of Crestwood Equity, and will continue to be listed on the New York Stock Exchange.

Darren Horowitz, analyst, Raymond James, said the strategic merger immediately improves cost of capital, thereby increasing competitiveness for growth.

The merger should result in reductions to general and administrative (G&A) expenses and offer a simplified partnership structure with a broader appeal to investors, Horowitz said.

Crestwood Equity is an MLP that operates an NGL supply and logistics business that serves customers in the U.S. and Canada. Crestwood Midstream, also an MLP, owns and operates several midstream businesses in unconventional shale resource plays across the U.S.

Strategic Highlights:

  • Greater growth and stability in distributions: Pro forma for the transaction, Crestwood Equity is immediately able to cover the current $0.55 per unit distribution and provide for longer-term distribution increases to all unitholders;
  • Drives unified corporate strategy by eliminating perceived conflicts of interest arising from financial complexity; and
  • Reduced administrative costs: Crestwood estimates $5 million of incremental cost savings can be achieved and added to the $25- to $30 million run-rate savings identified as a part of its 2015 cost reduction initiatives.

“Through all market cycles, particularly during periods of challenging commodity price cycles like we are currently enduring, cost of capital remains a critical driver of competitive positioning in the marketplace,” said Robert G. Phillips, chairman, president and CEO of Crestwood. “We have visibility to greater than $3 billion of investment opportunities around our asset footprint largely focused on the majority of the premier shale plays in North America.”

The permanent elimination of incentive distribution rights improves future costs of capital and better positions Crestwood to capture opportunities, Phillips said.

Crestwood Midstream reported $124.7 million in first-quarter 2015 EBITDA, a 26% increase compared to $98.9 million in the first quarter of 2014. Crestwood Equity reported EBITDA of $141.9 million, a 22% increase compared to $116.6 million in first-quarter 2014.

However, Crestwood Equity’s standalone EBITDA of $17.2 million was 36% less than Baird Energy’s estimates.

Citigroup Global Markets Inc. was exclusive financial adviser to Crestwood, and Andrews Kurth LLP and Simpson Thacher & Bartlett LLP were its legal counsel.

Evercore Partners was exclusive financial adviser to the conflicts committee of Crestwood Equity’s board and provided a fairness opinion on the proposed transaction and Locke Lord LLP was its legal counsel.

Tudor, Pickering, Holt & Co. was exclusive financial adviser to Crestwood Midstream and Paul Hastings LLP was its legal counsel.

The transaction is expected to close in the third quarter of 2015 and is subject to customary closing conditions, including approval of a majority of the unitholders of Crestwood Midstream.