Sunoco (NYSE: SUN) Deal is All About the Pipeline

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Merger Monday lived up to its moniker today as Energy Transfer Partners LP (NYSE: ETP) announced plans to acquire Sunoco Inc. (NYSE: SUN) for $5.3 billion.

Investors cheered the deal, sending shares of both companies higher. Following the announcement, Sunoco stock gushed higher by more than 20%, its biggest gain in more than three years. Energy Transfer Partners rose almost 6%.

The acquisition is just the latest in big-time energy deals fueled by the need for expanding pipeline networks.

The deal gives Energy Partners 7,900 miles of oil pipelines, as well as 4,900 Sunoco branded retail fueling stations in the United States.

Darren Horowitz, an analyst with Raymond James & Associates says the transaction will help Energy Transfer attain its objective of expanding both the geography of the company's pipeline network and the products it ships, adding, "It opens the door for greater growth."

Sunoco Deal Focuses on Pipeline Profits

Kelcy Warren, Energy Transfer Chairman and CEO, reiterated Energy Transfer's goal of diversifying into oil pipelines in response to the expected slowdown in the natural gas pipeline business.

"We need to be more diversified. We needed to be more involved in the movement of crude," Warren commented.

Several oil and natural gas production companies have shuttered natural gas operations in the wake of the fossil fuel's steady decline to prices not seen in more than a decade.

In a conference call Monday, Warren said that Energy Transfer may convert some underutilized gas pipelines into crude shippers. The profit for shipping crude on pipelines outweighs gas.

Warren said in the official statement, "Our goal is to derive more of our distributable cash flow from the transportation of heavier hydrocarbons like crude oil, NGLs [natural gas liquids] and refined products."

Sunoco's pipelines connect the Great Lakes and Northeast regions of the country to the Gulf Coast.

This is the latest in a handful of multi-billion dollar energy deals this year.

Penn Virginia Resource Partners earlier this month agreed to buy the energy pipeline company Chief Gathering for $1 billion to expand its presence in the booming shale natural gas sector. Private equity firm the Blackstone Group in February announced a $2 billion investment in Cheniere Energy Partners (NYSEAMEX: CQP) for a natural gas export plant in Louisiana.

Sweet Deal for SUN Stock

Sunoco CEO Brian MacDonald praised the merger as a win-win for shareholders.

MacDonald said the deal "delivers an attractive premium to our shareholders, while enabling them to participate in the future growth of the business. The combination with ETP provides substantial future value creation opportunities for Sunoco shareholders and ETP unit holders alike."

Energy Transfer is shelling out a 23% premium over Sunoco's closing price prior to the agreement. While a nice deal for Sunoco shareholders, it's still less than the 48% average premium of 97 deals in the pipeline sector in North America in the past 12 months, according to Bloomberg News.

"This transaction will enable Sunoco's businesses to realize their full potential by becoming an important part of a diversified leader in the energy industry," said MacDonald.

Sunoco, an owner of oil refineries since 1895 and the second-largest independent refiner behind Valero Energy (NYSE: VLO), is exiting the refinery business after posting a $1.7 billion loss in 2011. The company announced in September it had hired Credit Suisse to help with the shift.

Sunoco has already closed one Pennsylvania refinery and plans to sell its controlling interest in another to The Carlyle Group LP.

Under the terms of the deal, Sunoco shareholders will receive roughly $50.13 a share: $25 in cash and 0.5245 common units of Energy Transfer. The companies expect the merger to result in $70 million in savings.

Warren noted that Sunoco's retail business is "not core" for Energy Transfer. MacDonald said on the call that the retail units may be placed into a master-limited partnership.

The deal, approved by both boards, is expected to close in the second half, pending a vote from shareholders and a nod from regulators.

ETP gained 3.48% to close at $49.59. SUN gained 20.61% for the day to close at $49.34.

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