EUR 850.00 For Business Accounts Only

Morningstar | Valero Energy Throws in the Towel, Agrees to Acquire Valero Energy Partners

Valero Energy has agreed to acquire the remaining portion of narrow-moat Valero Energy Partners it does not own for $42.25 per unit in cash. We see the transaction as fairly reasonable, given our $45 fair value estimate, and we plan to lower our fair value to match the transaction price. We fully expect the transaction to close, given Valero Energy's ownership of two thirds of the limited partner units. A vote is not required, given the majority ownership stake, and we expect the transaction to close fairly soon once the usual closing conditions are satisfied.

The press release did not offer a rationale for the merger. However, Valero management has mentioned on a few occasions that essentially Valero Energy Partners units were not trading at a valuation that they deemed valuable enough to take units as currency in a drop-down transaction. In short, Valero Energy Partners was not an attractive financing vehicle for Valero Energy, which is a major reason why the limited partnership exists in the first place. Negative investor sentiment around master limited partnerships in general, and the existence of both incentive distribution rights and a distribution growth target that seemed out of touch with investors' desires toward eliminating IDRs and a focus on self-funding helped seal the partnership's fate, in our view.