Suburban Propane Partners LP (SPH.N) said it would buy Inergy LP's NRGY.N retail propane operations for about $1.8 billion in a deal that will double its customer base and make it one of the top propane retailers in the United States.
Suburban's biggest-ever deal is the second large acquisition in the U.S. propane industry in less than a year. Last October, AmeriGas Partners LP (APU.N) acquired Energy Transfer Partners LP's (ETP.N) propane business for $2.8 billion.
The acquisition will help Suburban spread its presence across a wider swathe of the United States and take on larger rivals AmeriGas and Ferrellgas Partners LP (FGP.N).
While propane has long been used to fire up barbecue grills, U.S. households and offices are increasingly using it as a heating fuel.
However, rising propane prices have pressurized margins at retailers who have been forced to buy the fuel at higher costs from wholesale sellers.
"It is a good deal for Suburban. The whole industry is depressed, so they are able to buy these assets at more depressed levels," said John Musgrave, a vice president at Swank Capital, whose Cushing MLP High Income Index holds a stake in Suburban.
"Given the high price of propane right now, the economy and the warmer-than-typical winter, it has been very hard for the retailers to pass on those price increases," Musgrave said.
Musgrave said there might be some consolidation among pure-play propane companies, adding that NGL Energy Partners LP (NGL.N) had been very "inquisitive."
Inergy sells propane in 33 states from 338 customer service centers. The acquisition will add about 600,000 customers and 325 million retail propane gallons to Suburban's operations.
Suburban said the deal, expected to close in the second half of the year, will make it the third-largest retailer of propane in the United States, measured by retail gallons sold in 2011.
In a regulatory filing, Inergy forecast second-quarter adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for its retail propane operations at $76 million.
Suburban's deal for Inergy's propane business includes a $1 billion issue of new Suburban senior notes, $200 million in cash and $600 million in new Suburban common units.
Inregy shares rose more than 12 percent to $18.98, their biggest intra-day percentage jump in more than three years. Suburban shares were down less than 1 percent at $43.56.
Inergy said the deal would help it focus on its midstream growth strategy as it evolves into a pure-play pipeline business.
"Proceeds from the sale of the retail propane business will substantially improve Inergy's balance sheet, we believe," analysts at RBC Capital markets wrote in a note, adding that the sale was a "positive."
Inergy's move reflects the trend among energy companies to add muscle to their pipeline assets as oil majors spend billions of dollars to produce shale gas and crude oil in areas with poor infrastructure.
"In our view, Inergy shares should trend higher from here on the retail propane exit and the refocusing of the business toward a midstream standalone," analysts at Baird and Co said.
Evercore Partners acted as a financial adviser to Suburban, while Greenhill & Co advised Inergy.
(Reporting by Swetha Gopinath and Vaishnavi Bala in Bangalore; Editing by Saumyadeb Chakrabarty)