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Sunoco trading suggests investors expect new bid

by Scott Stuart | Published May 2, 2012 at 3:46 PM

Shares of Sunoco Inc. traded up Wednesday, May 2, on some expectation that another bidder lurks for the oil refiner.

Dallas oil and gas marketer Energy Transfer Partners LP Monday agreed to acquire Sunoco in a deal valued at about $5.3 billion. The transaction offers Sunoco shareholders $25 per share in cash and 0.5245 of an Energy Transfer Partners share for each of their shares. Stockholders can pick cash or shares or both, subject to a 50% cash and 50% shares pro-ration.

Sunoco traded Wednesday at $49.72 per share -- a spread of about $1, or 2%, to the deal value. Based on a projected close date of Sept. 30, that represented an annualized return of about 5%, which looks like a standard deal. But there is no borrow in the Energy Transfer float, so risk arbitrageurs cannot hedge the stock portion of the merger. Normally, that would mean the spread would be wider to account for the market risk of holding the target shares or the cost of fashioning a hedge through options. Buying in Sunoco on Wednesday, without a hedge, suggests traders are expecting another bid for the company.

The Energy Transfer deal is not subject to financing, and there's no go-shop provision. The merger has a $225 million breakup fee, equivalent to $2.15 per share, which is 4% of the equity value of the deal.

Energy transfer expects the deal to close in the third or fourth quarter.

The prospects for another bid seem slight, an arb said. Sunoco has been undergoing a restructuring for more than a year, and other bidders would have had plenty of time to make an approach, the arb said. Energy Transfer has not provided any background, but it had to defend paying a relatively high multiple for the company, which could indicate that there was some competition. And it seems that Energy Transfer is paying a full price, the arb said.

Marathon Petroleum Corp. is the likeliest competitor if anyone surfaces for Sunoco, another arb said. But a bidder might have to be structured as a master limited partnership to compete on price, he said.

Still, the Sunoco deal is cheap compared to recent transactions, so there may be room for another bid, although it is not a straight pipeline deal, making the valuation complex, he said. But given the difficulty in hedging the deal, the trading in Sunoco indicates that buyers are taking a risk on being long the shares and betting that another bid is in the wings, the arb said.

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Tags: Energy Transfer Partners LP | Sunoco Inc.

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Sunoco trading suggests investors expect new bid

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