Aug 28, 2019

Blackstone Group seeks to salvage Tallgrass Energy investment

Dan Primack, author of Pro Rata

In golf, you don't want to be in the "tall grass." So far in 2019, the same rule applies to private equity's energy sector investments.

Driving the news: The Blackstone Group earlier this year invested $3.3 billion for a 44% stake in Tallgrass Energy, a Kansas-based midstream energy infrastructure company. But the stock has tanked since then, with Blackstone now opting to double down by offering to take over the entire company.

Tallgrass was the first investment out of Blackstone's debut infrastructure fund, which reportedly has secured over $12 billion in commitments (including a big slug from Saudi Arabia).

  • Tallgrass stock was at $24.18 just before the announcement. Yesterday it closed at $13.35 per share.
  • Reasons for the slide include missing Q2 earnings estimates on both the top and bottom lines, plus some investor concerns about potential conflicts related to Blackstone's original deal (in which it bought the GP, thus effectively controlling the LP in which it has a minority stake).
  • But, more broadly, it's been caught up in an overall energy sector slump. Even oil majors like Exxon Mobil and Royal Dutch Shell are down for the year.

Rather than cutting ties with Tallgrass, Blackstone is offering to take the company private for $19.50 per share. Tallgrass hasn't yet accepted the bid, saying it needs to first form an independent committee for consideration (Blackstone currently controls its board).

    • This isn't unique. Private equity firms ArcLight and Brookfield both offered to take over similar companies in which they had minority stakes via master limited partnership arrangements.

The bottom line: Blackstone bought into a bear market for energy stocks, despite the White House's much hyped deregulation. But rather than glumly head back into the clubhouse, it's pulling out another club, believing that its luck will improve if given enough time. Just like every amateur golfer ever.

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