(The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Updates with links.)
By Robert Cyran
NEW YORK, March 11 (Reuters Breakingviews) – Gas producer EQT’s old management weathered an activist investor outcry, squeaked through an expensive deal, and spun off its pipeline division – only to be ejected by the executives they bought out. Now, new management is putting the pieces back together, on Monday striking a merger with that spinoff, Equitrans Midstream. It’s a sign of how a shifting energy market has upended assumptions behind Wall Street-driven deals.
Back in 2018, EQT agreed to separate Equitrans under pressure from shareholders Jana Partners and D.E. Shaw. The two were annoyed that EQT had overpaid in its $6.7 billion deal for Rice Energy. They also thought spinning off the company’s pipelines would attract different investors, creating value. After all, midstream businesses that treat and transport gas return most of their cash to investors. Gas producers, historically, plowed their cash into expanding production.
Much has changed. A proxy fight installed Rice Energy’s Toby Rice as EQT’s CEO. Gas prices have seesawed wildly, plummeting during the pandemic, then skyrocketing in the recovery, only to sink again in the United States. With volatility high and rising renewable generation threatening to limit demand growth, investors have pushed firms to trim risky expansion and return capital. As EQT’s dividend increases, the rationale of splitting a cash-consuming and cash-returning business weakens.
Equitrans, meanwhile, hasn’t been the promised stand-alone success story. Anyone holding its shares saw a total loss of 7% over the past five years; its dividend yield, currently around 5%, has not attracted a horde of investors, who now have plenty of decent-return options from safe assets amid high rates.
Besides, Equitrans’ assets were built to service EQT’s gas production. By recombining, the companies reckon they can shave $250 million of costs, worth about $2 billion taxed and capitalized. That ably covers the $1 billion premium paid.
Yet EQT shares fell 8% on the news. Even if the theory behind the spinoff didn’t pan out, investors might still worry about shelling out for a deal when gas prices are near multi-decade lows.
But the all-stock transaction is paid for with shares that are richly priced, making them appealing currency: EQT trades at 6 times expected EBITDA, according to LSEG, while peers hover around 4 times. Moreover, pipelines produce steady cash flow, providing ballast when times are tough. The market’s wisdom urged EQT’s breakup; with the market changing, that wisdom is due an update.
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(Editing by Jonathan Guilford and Sharon Lam)