By: Dividend Sensei
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.
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.
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.