Wednesday, October 31, 2012

Structuring the Deal: Preserving Cash -- Guest Post

Today's blog features a guest post by Thomas Hofmann, former senior vice president and CFO of Sunoco, Inc.  Tom also serves as a director of West Pharmaceuticals and a director of the general partner of Penn Virginia Resource Partners, L.P.  In today's blog, Tom describes the detail and reasoning behind one of their recent transactions.  


Acquisition Financing

Joe’s October 17, 2012 post provided a cautionary tale for acquisition financing.  His concern focused on market conditions changing after the deal is structured but before the deal closes.  An issue Joe did not discuss but is relevant to the following discussion is the preservation of cash subsequent to an acquisition.

In the second quarter of 2012, PVR Partners (PVR) acquired the Marcellus Shale assets of Chief Holding for approximately $1 billion.  As in any acquisition, PVR was faced with the issue of determining how to pay for the acquired assets.  A little background is in order.  PVR is a publicly traded (NYSE) Master Limited Partnership (MLP).   As a result of being structured as a partnership, MLPs pay no US Federal taxes and generally distribute their cash flows (less maintenance capital and some other allowable reserves) to their unitholders (generally on a quarterly basis). Therefore, MLPs don’t accumulate cash nor do they build up unitholder (Shareholder) Equity.  In order to grow the asset base MLPs must access the capital markets.  They also must be mindful of maintaining appropriate debt coverage ratios and maintaining, or growing, their quarterly distributions per unit.  So the acquisitions need to be accretive and MLPs must raise both equity and debt to finance growth.

To eliminate the risk of market conditions changing after the deal was structured but before it closed, PVR embarked on a strategy to place all of the equity required to finance the acquisition prior to the announcement and closing of the deal.  They did the equity raise through three separate but related transactions.  Chief took back approximately $200 million of PVR equity as part of the $1 billion purchase price.   PVR then placed approximately $400 million of equity with Riverstone, a major Private Equity firm.  Finally, PVR sold $180 million of equity through a private placement with a number of major investors.  To preserve cash in the short term, the Chief shares will not receive distributions for the next six quarters and Riverstone will receive Payment in Kind (PIK) distributions for the next eight quarters. The balance of the purchase was financed through long term debt.  The attached slide from PVR’s investor call on April 10, 2012 provides additional detail of the terms of the equity placements. 

Thomas Hofmann  


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