Among the many consolidations of MLPs (recall the mergers of Magellan Midstream MMP, Atlas ATLS or the pending Enterprise/Teppco EPD/TPP) one deal stands out as a particularly bad deal: the opportunistic squeeze-out of minority shareholders of Hiland Partners (HLND) and Hiland Holdings GP (HPGP) at record low prices by oil magnate Harold Hamm. Management of the two firms seems to be getting increasingly worried about obtaining sufficient votes for the buyout at the October 20 shareholder meeting, judging by the flurry of proxy solicitations that we have received. With the recent recovery in gas prices the acquisition looks priced too cheaply, and it is no wonder that shareholders are reluctant to support this bad deal.
Billionaire Harold Hamm controls both HLND and HPGP and is squeezing out the public shareholders. He made his initial acquisition proposal of $9.50 for HLND and $3.20 for HPGP on January 15 when natural gas closed at $4.81. As natural gas continued to slide throughout the first quarter of the year, Hamm revised his price to $7.75 (HLND) and $2.40 (HPGP) on April 20, when natural gas traded at $3.67. Today, natural gas trades above $5, or about 5% higher than when the first acquisition proposal was made. Since the decline of natural gas prices was specifically mentioned as a reason for the reduced merger consideration, it is no wonder that shareholders are reluctant to support the deal.
Hiland is a small MLP that has the typical GP/LP setup: Hiland Partners (HLND) owns the assets, whereas Hiland Holdings GP (HPGP) acts as general partner and manages HLND. Billionaire Harold Hamm, directly and through trusts as well as through Continental Gas, controls the GP and thereby also Hiland Partners. A diagram in the proxy statement illustrates the complex ownership structure:
HLND went public in February 2005 at $22.50, whereas HPGP had its IPO in September 2006 at $18.50. After doubling from their IPO prices, both stocks crashed last year. HPGP and HPND are now off 65 to 85% from their IPO prices.
Harold Hamm is #164 on the Forbes list of the world’s richest people with an estimated net worth of $3.5 billion. We are not quite sure why exactly he is pinching pennies on taking the Hiland companies private, but it is clear that he did not become a billionaire by buying high and selling low.
Both companies are acquired simultaneously. The merger agreement is conditioned upon approval by a majority of the minority of each HLND and HPGP. In addition, each of the mergers is conditioned upon the other being approved. And this is where the problem lies for Hamm. After revising his acquisition price down when gas prices were falling and valuations were at a trough, shareholders are now questioning whether price adjustments need to be one way streets only. Getting one bad deal approved is tough, but two at the same time will be a real challenge. The problem is compounded by the absence of large holders of the stock, which means that Hamm has to convince a large heterogeneous base of retail shareholders to vote. Institutions wisely stayed away from owning stock in which a controlling shareholder is dominant. We described in our book about merger arbitrage how minority shareholders get squeezed out again and again at low prices, and the Hiland companies follow the script quite closely: an IPO, a tough external event (fall in gas prices), suspension of dividends, and finally a squeeze out at a fraction of the IPO so that the controlling shareholder essentially received free money from investors.
Most shareholders bought the Hiland stocks for their rich dividends. The squeeze-out is scheduled at prices that are equivalent to two annual dividend payments. We expect that the closing of the merger will be delayed because not enough votes will be cast in favor by the October 20 meeting. Whether shareholders can expect an increase in the merger consideration is a tough call that we will pass on. Considering the discount to the proposed squeeze-out prices that the shares are trading at we consider it a risk worth taking on.
Disclosure: Thomas Kirchner manages the Pennsylvania Avenue Event-Driven Fund (PAEDX), which owns shares of HLND. He is the author of the book Merger Arbitrage: How to Profit from Event-Driven Arbitrage (Wiley Finance, 2009).
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