This Merger Will Create One Of The Best High-Yield, Must Own Dividend Growth Stocks In America

Posted On October 10, 2018 11:51 am

Previously I’ve explained why I consider Antero Midstream Partners (AM) and Antero Midstream GP (AMGP) to be superb long-term high-yield, income growth investments. In fact, I’ve made this MLP/GP pair 10% of my retirement portfolio. In that article I explained why the biggest risk to owning Antero Midstream was the potential for a merger of the two stocks.

Well management has completed its strategic review, and indeed now a merger will occur in Q1 2019. But unlike what I and many midstream investors feared, the terms of the merger are the most investor friendly I’ve seen in any MLP/midstream merger. In fact, there are three reasons why the new Antero Midstream Corp will become one of the best high-yield dividend growth stocks in America. One that’s almost certain to deliver many years of safe, generous, and fast rising income, and market crushing total returns.

A Huge Win For All Investors

When the merger closes in Q1 2019, Antero Midstream GP will buy 100% of Antero Midstream Partners’ units in a cash and stock deal. AM investors will get 1.635 shares of the new Antero Midstream Corp for each unit they currently own, plus $3.42 per share in cash. This means a conversion ratio of 1.83 and values the MLP at a 7% premium.

The only downside to the deal for AM investors is that this is a corporate conversion meaning a taxable event. Thus any deferred tax liabilities you’ve accrued (AM’s previous payouts reduced your cost basis), will now come due (long-term capital gains taxes). Anyone whose cost basis is below the buyout price (about $31.5) will not face a tax bill. But the benefits of the merger and corporate conversion more than offset this one negative. That’s because the new Antero Midstream Corp will be a far stronger high-yield income investment.

Source: merger presentation

The biggest fundamental benefit will come from the elimination of Antero Midstream Partners’ incentive distribution rights or IDRS. These were set to send up to 50% of marginal cash flow to AMGP (and thus mostly to Antero Resources) above a certain quarterly distribution. While the current IDRs are not a significant drag on the MLP’s growth or profitability, in 5+ years they would have started to make profitable and fast payout growth harder. With their elimination Antero Midstream will enjoy even richer returns on investment. And keep in mind that since its IPO in 2013, AM has invested $3.1 billion into projects with cash yields of 25%. That’s double the industry average and it currently has a $2.5 billion growth backlog of projects with projected cash yields of 17% to 33%. With the IDRs gone those projects will now yield closer to 20% to 40%.

But what about Antero Midstream Partners’ current payout? While many MLP corporate conversions and mergers result in payout cuts, but this one actually results in a payout increase.

Source: merger presentation

That’s because, adjusting for the conversion ratio and new dividend growth guidance, AM investors will end up with 3% higher dividends than under management’s previous guidance.

But most importantly of all, the merger will mean to the new Antero Midstream’s financial fundamentals will greatly improve, which will make it a far better high-yield dividend growth stock.

Photo: “Money!” by Tracy O is licensed under CC BY-SA

About author

Dividend Sensei
Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I currently write for both Seeking Alpha, Simply Safe Dividends, and DividendSensei.com My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams, and enrich their lives. With 22 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams. I'm currently on an epic quest to build a broadly diversified, high-quality, high-yield dividend growth portfolio that: 1. Pays a 5% yield 2. Offers 7% annual dividend growth 3. Pays dividends AT LEAST on a weekly, but preferably, daily basis

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  1. Chris October 10, 2018 at 3:45 pm

    Would you buy AM or AMGP stock today?

    • Dividend Sensei October 31, 2018 at 10:56 am

      Indeed I would. Very strong buy.

  2. EP October 30, 2018 at 11:44 am

    Let’s see..you wrote if the tax basis is below the buyout price=no tax bill???? Clarify please.

    • Dividend Sensei October 31, 2018 at 10:58 am

      Distributions lower your cost basis. So If you bought at a high enough price that you’re underwater on your investment, then there shouldn’t be a tax bill from the conversion.

  3. slowly learning one step at a time… November 8, 2018 at 11:35 pm

    being a noob i am confused. if i were to invest today which would be better to purchase AMGP or AM? by purchasing AMGP, if i read this correctly, at the time of the merger i would get paid 31.5/sh, 3.42$ cash/sh and i would also receive 1.635 sh of the new company per share owened. i do not know what the advantage of purchasing AM would be, i’d assume it would be converted into some number of shares of the new company but i didn’t see that articulated here.

    • Dividend Sensei November 9, 2018 at 5:25 am

      So there isn’t much difference. Buy AM today and you’ll have one final higher payment before the deal closes (and minor tax bill). Buy AMGP and you get slightly lower final distribution before corporate conversion and thus a slightly lower tax bill (all MLP to corporate conversions are taxable events).

      AM investors can choose either the cash and stock buyout or to get paid for their AM units in all stock from AMGP which will trade under a new ticker starting in Q1 2019.

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