Morningstar | UGI Corporation to Purchase 75% of AmeriGas It Doesn't Own. See Updated Analyst Note from 02 Apr 2019
We are increasing our AmeriGas fair value estimate to $34 per unit after UGI Corporation announced plans to acquire the remaining AmeriGas shares it doesn't own for $2.44 billion. UGI will pay $7.63 in cash and 0.5 shares of UGI for each common unit of AmeriGas, a 12.5% premium to AmeriGas' April 1 closing price.As of early trading April 2, the implied valuation of the takeover is roughly $34 per share, or a $2.00 per unit increase to our standalone estimate for AmeriGas. Our no-moat and negative moat trend remain unchanged. We do not cover UGI Corporation.
The move comes as a surprise to us, as we saw little rationale in UGI increasing its exposure to unregulated operations when its diversified utility peers were transitioning to fully regulated utilities. UGI acquires a no-moat highly leveraged company with numerous headwinds, including deteriorating industry dynamics, low natural gas prices incentivizing customer switching, volume and cash flow volatility from warmer-than-normal weather, and organic volume declines. UGI management notes AmeriGas' cash flow will help support UGI's capital plan and dividend increases.
We view the transaction as a positive outcome for AmeriGas shareholders. While the transaction offers only a slight premium to our fair value estimate, we think it is the best option for shareholders. We viewed AmeriGas' current $3.80 per unit distribution as unsustainable. Given AmeriGas' deteriorating financial position, we forecast AmeriGas needed to cut its distribution to $2.60 per unit to create a sustainable distribution payout and allay the need for further equity and debt issuances. UGI's regulated operations, midstream services, and international businesses should provide AmeriGas shareholders a more stable cash flow profile.
The transaction is expected to close in the fourth quarter of fiscal year 2019 and is subject to regulatory approval and AmeriGas shareholder approval.
AmeriGas Partners is a holding company. Through its operating partnership, AmeriGas Propane, L.P., the company is engaged as a retail propane distributor. The company serves residential, commercial, industrial, agricultural, wholesale and motor fuel customers from several propane distribution locations. In addition to distributing propane, the company also sells, installs and services propane appliances, including heating systems and propane-powered generators. As part of its overall transportation and distribution infrastructure, the company operates as an interstate carrier throughout the continental U.S.
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