Two New Buyout Targets

11/25/2010 12:01 am EST


Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Elliott Gue, editor of Personal Finance, likes the deal potential of a gold miner and a gas pipeline general partnership as corporations deploy dirt-cheap cash.

Forget consumer lending. The corporate debt market is booming, and capital has never been cheaper. US companies issued more than $160 billion worth of debt in September, including nearly $40 billion in bonds sold by high-yield issuers.

Corporate profitability is soaring; unlike beleaguered consumers, many US companies have the scope to fund further borrowing. All that cheap money provides ample fuel for future growth. In addition to investing in internal projects, corporations have put this cash to work in mergers and acquisitions. Selective investors can reap near- and long-term rewards from the latest M&A frenzy. Here are two attractive buyout candidates.

Buy the Brains of a Gas Pipeline
Master limited partnerships (MLPs) consist of two entities: a limited partner (LP) and a general partner (GP). LPs don't manage the MLPs' assets; the GP handles the day-to-day operational decisions. GPs typically receive what's called an incentive distribution fee for these duties.

Only a handful of GPs are publicly traded, and that number is shrinking quickly as LPs buy out their parents to eliminate incentive distributions and simplify their organizational structure. Recent deals include Enterprise Products Partners' (NYSE: EPD) pending takeover of Enterprise GP Holdings LP (NYSE: EPE) and Penn Virginia Resource Partners' (NYSE: PVR) planned buyout of Penn Virginia GP Holdings LP (NYSE: PVG).

Another likely takeover candidate is Energy Transfer Equity LP (NYSE: ETE), the company that controls the GP of Energy Transfer Partners LP (NYSE: ETP) and Regency Energy Partners LP (Nasdaq: RGNC). The GP yields 5.6% and should boost its payout in coming quarters thanks to expected increases in the incentive distribution fees it collects.

Both of Energy Transfer Equity's LPs own midstream energy assets that generate reliable revenue streams and should benefit from the infrastructure build-out required to support growing oil and gas production from US unconventional fields. The GP would likely fetch a sizeable premium in any deal. Buy Energy Transfer Equity LP under 45. [Shares closed at $39.59 Tuesday-Editor.]

Gold Miner Could Fetch a Bid
Vancouver-based Minefinders (AMEX: MFN, Toronto: MFL) produces about 100,000 ounces of gold annually from its Dolores mine in Chihuahua, Mexico. The company brought Dolores online in March 2009 and has already started to explore potential expansions, including the construction of a new on-site mill.

Management is also evaluating development options for its La Bolsa project in Sonora, Mexico. At current gold prices, Minefinders estimates that it could earn a 95% internal rate of return after $31 million in start-up costs. Meanwhile, drilling and exploration work at the company's La Virginia site have yielded promising initial results. With plans to quintuple its gold output over the next five years, Minefinders and its assets could be an attractive target for a larger outfit looking to grow production.

Shares of Minefinders have lagged in recent months, primarily because of operational difficulties at Dolores. As faulty equipment and other temporary issues are resolved, the stock should enjoy some upside. Minefinders is a buy up to $10 for aggressive investors. [Shares closed just above that target Tuesday-Editor.]

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