EUR 850.00 For Business Accounts Only

Morningstar | UGI Offers Best Option for AmeriGas Shareholders

AmeriGas' lack of an economic moat is the product of industry dynamics, low natural gas prices, volume fluctuations due to weather volatility, and the company's need to acquire businesses to offset organic volume declines. We view the outlook for AmeriGas' business negatively. We forecast low natural gas prices in our long-term outlook, which we believe will continue to pressure the company's core business.UGI Corporation recently 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. The transaction is expected to close in the fourth quarter of fiscal year 2019, and is subject to regulatory approvals and Amerigas shareholder approval.On a standalone basis, the unusually warm 2016 and 2017 winters hurt results and stretched AmeriGas' distribution coverage. We forecast AmeriGas will cut its distribution to $2.60 per unit from $3.80 if the UGI acquisition fails. This creates a sustainable distribution payout of roughly 1.4 times, up from the current 1.0, without the need for significant equity and debt issuances.A lower distribution payment also provides opportunities for AmeriGas to reduce its highly leveraged balance sheet. AmeriGas' acquisitions have slowed, making it more difficult to offset internal volume declines, which we estimate at 1.5% per year after a return to normal weather. Partially offsetting our expectations for volume declines are attractive growth opportunities in the company's national accounts and cylinder exchange program. National accounts are usually less sensitive to weather and backed by the largest salesforce in the industry, positioning the unit well. Summer demand from AmeriGas' growing cylinder exchange program provides a nice offset to otherwise winter-driven demand.