Stonepeak and Brookfield Consider a Deal to Buy Tallgrass Energy

(Bloomberg) -- An investor group that includes Stonepeak Infrastructure Partners and Brookfield Asset Management Inc. is considering a deal to buy oil and gas pipeline company Tallgrass Energy LP, according to people familiar with the matter.

The consortium is holding talks with the Leawood, Kansas-based company, said the people, who asked to not be identified because the details aren’t public. A final deal hasn’t been reached and negotiations may fall apart, they said.

Tallgrass jumped the most since May 2016 on Wednesday, rising 12 percent to $23.01 as of 3:11 p.m. in New York trading, giving the company a market value of almost $6.5 billion.

Spokeswoman Phyllis Hammond said the company "does not respond to speculation." A representative for Brookfield declined to comment while a representative for Stonepeak didn’t respond to a request for comment.

Pipeline Buyouts

Private equity firms and alternative asset managers such as Stonepeak and Brookfield have been aggressively seeking to invest in U.S. energy infrastructure, which requires massive infusions of capital to expand amid a surge in U.S. oil and gas production.

A potential deal for Tallgrass would be the second-largest take-private of a U.S. pipeline operator on record, behind Kinder Morgan Inc.’s $22 billion sale in 2007 to an investor group that included Goldman Sachs Group Inc.’s private equity arm, American International Group Inc. and the Carlyle Group LP, according to data compiled by Bloomberg.

Analysts have pegged Tallgrass as a buyout candidate as publicly traded pipeline operators struggle with low valuations.

Volatility in the oil and gas markets and changes to the U.S. tax code put immense stress on Tallgrass and other energy infrastructure players that had initially been set up as master limited partnerships, or MLPs, which don’t pay taxes at the corporate level in exchange for passing on most of their income to investors.

MLPs lost some of their tax benefits in March after regulators said partnerships could no longer charge customers for taxes they don’t pay. The downturn in commodity prices also made it difficult for them to keep promising fat payouts to unit-holders while investing in new infrastructure.

In response, Tallgrass and other pipeline firms have been striking deals to shed their MLP status. Tallgrass’s general partner -- the entity in charge of managing its assets -- closed a $1.7 billion deal for its MLP on July 2. Its shares were down about 1 percent since then, before surging Wednesday on the news of a potential takeover.

Oil and Gas Network

Tallgrass controls an extensive network of infrastructure for gathering, processing and transporting oil and gas throughout the central U.S., according to its website.

Its assets include the Rockies Express Pipeline, one of the largest natural gas conduits in the country, extending between the Rocky and Appalachian Mountains. Other properties include 1,500 miles of natural gas gathering and processing lines, a nearly 800-mile crude oil pipeline system and division that handles water used in hydraulic fracturing.

Tallgrass was formed in 2012 by the private equity firms Kelso & Co. and the Energy & Minerals Group to buy a batch of assets that Kinder Morgan had to sell win regulatory approval for its $23 billion takeover of El Paso Corp., according to regulatory filings.

Kelso and Energy Minerals are still sizable shareholders in the company.

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