Midstream infrastructure owner Hess Infrastructure Partners (HIP) agreed to a broader recapitalization of its business, according to a 4 October press release.
Publicly-listed Hess Midstream Partners LP (HESM) agreed to acquire HIP, which includes Hess Corporation’s and Global Infrastructure Partners’ (GIP) ownership interests, HIPs outstanding economic general partner interest and incentive distribution rights in HESM.
As part of the deal, HESM will acquire HIP’s 80% interest in HESM’s oil and gas midstream assets and HIP’s water services business.
In September 2015 the GIP II fund entered into a USD 2.675bn strategic joint venture with Hess Corporation through the acquisition of a 50% in HIP that implied 18x EBITDA multiple, according to Inframation Deals.
Total consideration for the contribution of Hess and GIP’s ownership interests in HIP and its assets and businesses to HESM is valued at approximately USD 6.2bn, based on the closing price of HESM common units on 2 October.
HESM will assume approximately USD 1.15bn of existing HIP debt and will issue approximately 230 million HESM units and pay a cash consideration of approximately USD 550m to Hess and GIP collectively.
HESM will incur additional borrowings of approximately USD 960m, resulting in an expected total debt of USD 1.76bn at the close of the transaction. Hess Midstream LP, the name of the entity, is expected to have consolidated leverage of approximately 3.0x total debt to expected 2019 Adjusted EBITDA at closing.
HESM’s organizational structure will be converted into an “Up-C” structure in which IDR payments to sponsors are eliminated.
In what is expected to be a non-taxable transaction, public unitholders will receive newly issued securities in Hess Midstream that will be taxed as a corporation for US federal income tax purposes, and HESM will continue as a controlled subsidiary of Hess Midstream.
HESM’s existing public unitholders’ current ownership of approximately 17 million units of HESM will be converted into the same number of shares of Hess Midstream representing 6% of the new, larger consolidated entity on an as-exchanged basis.
Hess and GIP will each own 47% of the new consolidated entity, on an as-exchanged basis, primarily through their limited partner interests in HESM, which will be exchangeable into Hess Midstream securities on a one-for-one basis.
Hess Midstream plans to maintain HESM’s targeted 15% distribution per unit growth through at least 2021, with Hess Midstream’s targeted distribution coverage ratio increasing to 1.2x.
The firm’s forward guidance shows Hess Midstream’s 2020 net income of USD 440m–USD 480m, its adjusted EBITDA guidance representing an approximate 25% increase from the midpoint of HESM’s 2019 consolidated adjusted EBITDA guidance, and 2020 capital guidance of approximately USD 350m.
Executives said the newly created Hess Midstream will have a greater than USD 7.25bn enterprise value with access to a broader investor universe.
The deal’s other benefits that executives expect to reap are that Hess Midstream will maintain integration with Hess Corporation and an unchanged contract structure that includes minimum volume commitments and an annual rate redetermination mechanism.
There is an expectation the deal will be immediately accretive to distributable cash flow per unit/share commencing with 6% accretion in 2020, based on the midpoint of Hess Midstream’s Adjusted EBITDA guidance range; strong long-term accretion, with greater than 15% accretion in 2021 and 2022.
The IDR simplification will lower the cost of capital, executives claimed.
The transaction could provide the new consolidated entity with the ability to fund both organic capital program and growing distributions with conservative leverage and without the need to access the equity capital markets.
The transaction is expected to be non-taxable to current public unitholders, and Hess Midstream is not expected to make material tax payments for the next several years.
In connection with the transaction, Goldman Sachs and J.P. Morgan acted as financial advisors and Latham & Watkins LLP acted as legal advisors to HIP and its partners. Intrepid Partners, LLC acted as financial advisor and Gibson, Dunn & Crutcher LLP acted as legal advisor to the conflicts committee. Morgan Stanley & Co. acted as financial advisor to Hess Corporation.