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Thoughts on Magellan Midstream Partners (MMP) buying its own general partner (MGG) out



March 04, 2009 – Comments (0) | RELATED TICKERS: MGG , MMP , EPE.DL2

On several previous occasions, I've stated that many master limited partnerships are good investments. Their general partners are possibly more so, as their distributions grow at a faster rate due to the incentive distribution structure. I picked Magellan Midstream Holdings (MGG), since I like the underlying asset base and growth potential.

Now, Magellan Midstream Partners (MMP, the limited partner) has offered to buy the GP out in an all-stock transaction. THe GP structure is a bit of a disadvantage for the limited partners, since above a certain level of volume, the GP gets a large percentage of the distributions. If the buyout goes through, it should be an advantage for MMP. In addition to enabling MMP to grow their own distribution at a higher rate, this transaction will effectively decrease their cost of capital, now that more cash will be available for acquisitions, maintenance, etc. I don't know that it's a huge positive, but every bit of cash helps in this environment.

In CAPS, I basically ended MGG and opened a pick on MMP. In real life, I own neither of these yet. I do own Enterprise GP holdings, but this entity holds the general partners of three separate firms. I don't see a transaction like this happening with EPE. However, given that publicly traded general partners seem to have been overly punished, I wouldn't be surprised to see other limited partners try the same strategy.

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