The proposed $19 billion merger between Magellan Midstream (NYSE:MMP) Partners and Oneok is approaching a decisive moment, with the final vote scheduled for Thursday this week. The deal has received backing from SS&C ALPS Advisors, Magellan's largest shareholder, who operates the $7 billion Alerian MLP exchange-traded fund. SS&C ALPS Advisors' support follows the recommendation of Institutional Shareholder Services, a significant proxy advisory firm.
Despite this endorsement, the merger is not guaranteed approval due to resistance from many retail investors over potential negative tax implications. A lack of votes from these investors could also pose a challenge as any non-vote effectively counts as a vote against the merger. For the deal to pass, Magellan requires support from half of its total units outstanding.
If there's insufficient backing, industry insiders believe Magellan may defer the vote to secure more approval rather than accepting defeat. Current market trends suggest a positive outcome for the deal. On Tuesday, Magellan's unit price increased 0.7% to $68.97, trading within 2% of the deal's value, which is nearly $70.25. On the other hand, Oneok shares slightly dipped by 0.6% to $67.78.
The merger proposal has faced opposition since its inception. Energy Income Partners, one of Magellan's largest institutional investors holding a 3% stake, has expressed its disapproval openly. The firm argues that the transaction could lead to substantial tax burdens for investors and strategically questionable moves, suggesting that Magellan might fare better independently.
For older investors planning to include Magellan in their estates, the tax implications are severe due to accelerated deferred taxes resulting from the deal. Many individual investors have also expressed discontent about potential tax bills exceeding $20 per unit.
Magellan maintains that the merger provides a substantial premium to its unitholders. The current deal value of about $70 surpasses the initial deal value of $67.50 and the pre-deal unit price of $55. The company argues that the transaction would result in a more diversified entity with reduced overall business risk.
However, the deal faces several hurdles. Engaging retail investors to vote is more challenging than getting institutional investors on board. Over 40% of the units could be held by individuals. Another issue revolves around total-return swaps and other tax-friendly ways institutional investors gain exposure to Magellan and similar partnerships.
These derivatives are used by entities such as pension funds, foreign investors, hedge funds, and merger arbitrage funds to avoid adverse tax consequences. The extent of Magellan's stake held via these tax-avoidance vehicles is uncertain but believed to be significant.
The merger's future now depends on how banks and brokerage firms, typically the holders of underlying units in these swaps, decide to vote. If they choose not to vote, it could make approval more challenging. Their voting decision is complex as they do not control the economics of the units held for swap clients. If swap clients were given voting rights, they could potentially be considered as the owners of the underlying units and thus liable for taxes.
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