NEW YORK--(BUSINESS WIRE)--Sandell Asset Management Corp. (“Sandell”), a shareholder of SemGroup Corporation (“SEMG”, “SemGroup” or the “Company”) (NYSE: SEMG), has publicly released a letter to the Board of Directors (the “Board”) of the Company requesting that the Board review strategic alternatives including the exploration of the sale of SEMG, in light of what, we believe, is a gross undervaluation of the Company’s shares in the public market and growing M&A activity in the sector.
Tom Sandell, CEO of Sandell, stated: “Although we believe management and the Board of SemGroup have been respectable stewards of the Company over the past few years, we simply believe that in this environment the best outcome for shareholders is for the Company to sell itself. As long time investors in the North American energy infrastructure industry and SEMG’s shares, we firmly believe there are a number of potential acquirers for the entire company at significant premiums to current trading levels given its highly valued asset base and pipeline of exciting growth opportunities.”
Mr. Sandell continued, “Our analysis has led us to conclude that this market environment, driven by extreme energy price volatility, has disproportionately affected SEMG’s share price due to its smaller equity market capitalization, lower liquidity profile and unwieldy mix of assets. As an example, from recent highs SEMG share price has declined almost 2X the average share price decline of a basket of potential acquirers.1 Of note, this basket has an average equity market capitalization of approximately $38bn versus SEMG’s current equity market capitalization of approximately $3bn, with average trading volumes 8X-9X greater than those of SEMG, demonstrating what appears to be amplified selling pressure investors are placing on smaller, less liquid public companies in the energy infrastructure industry. We believe that this adverse dynamic will persist for longer than most expect given the seismic changes occurring in global energy markets.”
Mr. Sandell added, “In our view, given the availability of cheap debt and equity capital, a takeout price of up to $104/share for SEMG would easily be justified. This price would yield modest accretion to cash available to pay dividends in Year 1 for the acquirer, and provide significant upside with the maturation of SEMG’s asset base, the deployment of growth capital throughout SEMG’s footprint and the realization of significant balance sheet, tax and operational synergies.”
1 Basket of potential acquirers include Magellan Midstream Partners (MMP), Plains All American Pipeline LP (PAA), Spectra Energy Corp (SE), Enterprise Products Partners LP (EPD), Kinder Morgan Inc, (KMI) and Sunoco Logistics Partners LP (SXL)
The text of the letter is as follows:
January 26th, 2015
6120 South Yale Avenue, Suite 700
Tulsa, OK 74136-4216
Ladies and Gentlemen:
As you know, we are shareholders of SemGroup Corporation (“SEMG” or the “Company”) and have been recurrent investors since the Company emerged from bankruptcy in 2009. We re-invested in the Company recently as we believed SEMG’s transition to a pure-play GP HoldCo through 1) the dropdown of all its MLP-qualifying assets into Rose Rock Midstream LP (“RRMS”) and 2) the disposal of all other non-core assets would unlock significant shareholder value. We also felt that the appointment of Mr. Carlin Conner as CEO early in 2014 brought the right balance of skills to execute on such a transition.
According to our analysis, this transition to a simplified, pure-play GP HoldCo was crucial given the Company’s disparate set of assets both from a geographic standpoint (US, Canada, Mexico and the UK) and from a business standpoint (crude oil storage, transportation, gathering and trucking, natural gas gathering and processing and liquid asphalt terminalling). This combination of assets complicated investor analyses, particularly given the Company’s small equity market capitalization and limited liquidity.
Unfortunately, we were disappointed that Mr. Conner’s first Strategic Review, delivered in November 2014, was lacking with respect to both the dropdown and simplification strategies. With respect to the dropdown strategy, Mr. Conner eschewed a commitment to the accelerated, full dropdown strategy of SEMG’s MLP-qualifying assets into Rose Rock Midstream LP (“RRMS”) that we had previously suggested. Instead, he offered a more tentative strategy that initially envisioned SEMG’s crude oil interests alone being dropped into RRMS. Furthermore, with respect to the simplification strategy, there was no hard commitment to sell what we considered non-core, non-MLP qualifying assets (i.e., SemMexico and the UK-based SemLogistics). In fact, Mr. Conner committed to an enhanced midstream strategy with respect to SemMexico.
Taken together, these decisions represented a stark departure from what, we believe, shareholders were expecting, namely a clear line of sight to a pure-play GP HoldCo which would, in our opinion, have unlocked substantial value for shareholders by simplifying Company analysis. Despite our disappointment, we believed that the intrinsic value of SEMG’s asset base would eventually be reflected in its share price as SEMG generated more than 85% of its gross margin from fixed-fee contracts and the Company would continue to drive outsized dividend growth through employing its under-levered balance sheet to execute on its considerable capital deployment program. We were also encouraged by the fact that sell-side analysts continued to see the ‘forest from the trees’ and remained positive on SEMG’s prospects and valuation, with trading price targets ranging from $74/share to $96/share, exclusive of any control premium.
As this current industry environment progresses however, we are less and less inclined to believe that SEMG’s share price will appropriately reflect intrinsic value; its disparate asset base exposes the Company to a significant number of cross-currents across crude oil and natural gas drilling and infrastructure markets across the US, Canada, Mexico and the UK. This complicates investor analyses for an investment that is limited by SEMG’s increasingly small equity market capitalization and declining liquidity profile.
In our view, however, there is a way for the Company to realize its intrinsic value through reviewing strategic alternatives including a sale of the Company. We believe there are a number of potential acquirers who would covet SEMG’s irreplaceable, global crude oil infrastructure assets as well as its strong position in the Montney/Duvernay Canadian shale basins, its US mid-continent gas gathering and processing assets and its exposure to Mexican energy reform through its SemMexico assets. Moreover, as the cost of debt and equity capital have remained quite low for many of these acquirers, we believe, there would be an active competitive process for the Company, yielding a significant control premium over current share price given SEMG’s moderate enterprise value, strategic assets and under-levered balance sheet. In fact, during our last conversation Mr. Conner reflected this sentiment by commenting that the ‘sharks were circling’ as SEMG’s share price declined at a pace greater than its industry suitors.
In summary, with the ramping up of M&A activity in the North American energy infrastructure industry and the continued strong debt and equity capital financing markets, we are requesting that the Board immediately commence a review of strategic alternatives including an exploration of the sale of SEMG in order to maximize value for all shareholders.
Thomas E. Sandell
Chief Executive Officer
About Sandell Asset Management Corp.
Sandell Asset Management Corp. is a leading private, alternative asset management firm specializing in global corporate event-driven, multi-strategy investing with a strong focus on equity special situations and credit opportunities. Sandell Asset Management Corp. was founded in 1998 by Thomas E. Sandell and has offices in New York and London, including a global staff of investment professionals, traders and infrastructure specialists.
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