Nut Tree Capital Management and Caspian Capital Increase Offer to Purchase Martin Midstream Partners L.P. to $4.50 per Common Unit In Cash

Rhea-AI Summary

Nut Tree Capital Management and Caspian Capital have increased their offer to purchase Martin Midstream Partners L.P. (MMLP) to $4.50 per common unit in cash. This enhanced offer represents a 48% premium over Martin Resource Management 's (MRMC) previous proposal of $3.05 per unit. The increased offer, up from their initial $4.00 per unit, is based on financial analysis of MMLP's public information, recent results, and current peer valuations.

Despite repeated requests, Martin Midstream GP 's Conflicts Committee has refused to meet directly with Nut Tree and Caspian. The investors believe their proposal is superior to MRMC's, which they claim significantly undervalues MMLP and its future prospects. They call on the Conflicts Committee to act in the best interests of all MMLP unitholders by meeting with them and requiring approval from the majority of unaffiliated unitholders for any transaction with MRMC.

Positive

• Increased offer of $4.50 per common unit represents a 48% premium over MRMC's proposal
• Potential for additional value subject to due diligence findings
• Offer is fully financed with no financing condition in definitive agreements
• Investors claim MMLP has potential for distributable cash flow above $1.00/common unit annually
• MMLP's DSM Semichem joint venture expected to contribute over $6 million annually to profitability
• Potential for accretive debt refinancing opportunity in August 2025, potentially saving $10 million per year

Negative

• Conflicts Committee's refusal to meet directly with Nut Tree and Caspian may hinder the acquisition process
• Current MMLP leverage ratio of 3.9x is above the target of 3.75x, potentially affecting distribution capabilities

Insights

Financial Analyst

This enhanced offer from Nut Tree and Caspian represents a significant development in the potential acquisition of Martin Midstream Partners L.P. (MMLP). The increased bid of $4.50 per common unit in cash is 48% higher than Martin Resource Management 's (MRMC) initial offer of $3.05. This substantial premium warrants careful consideration.

Key financial aspects to note:

• The new offer values MMLP at approximately 8.5x to 9.0x expected 2024 EBITDA, aligning more closely with industry peers.
• MMLP's projected distributable cash flow of $29 million ($0.74/unit) for 2024 suggests potential for future distributions.
• The DSM Semichem joint venture is expected to contribute $6 million annually to profitability ($0.16/unit).
• A potential debt refinancing opportunity in 2025 could save $5 million annually ($0.12/unit).

The offerors' analysis suggests MMLP could potentially distribute $0.45-$0.70/unit annually, implying a unit value of $6.50-$10.50 based on industry average yields. This indicates that even the increased offer might still undervalue MMLP's potential.

However, it's important to note that these projections are based on the bidders' analysis and may not fully account for all risks or potential downside scenarios. The Conflicts Committee's reluctance to engage directly with Nut Tree and Caspian raises questions about the process transparency and potential conflicts of interest.

Corporate Governance Expert

The situation at MMLP presents several significant corporate governance concerns:

• Conflict of Interest: MRMC's initial offer and its relationship with MMLP's General Partner create a clear conflict of interest. The Conflicts Committee's role is important in ensuring fair treatment of unaffiliated unitholders.
• Transparency: The Conflicts Committee's refusal to meet directly with Nut Tree and Caspian, despite their higher offer, raises questions about the transparency and fairness of the process.
• Unaffiliated Unitholder Protection: The absence of a commitment to require approval from a majority of unaffiliated unitholders for any transaction with MRMC is concerning. This safeguard is often implemented in similar situations to protect minority interests.
• Information Disclosure: The removal of relative valuation slides from MMLP's Investor Relations website, as mentioned by the bidders, could be seen as an attempt to limit information available to unitholders and potential bidders.

These issues highlight the importance of robust corporate governance practices in M&A situations, especially those involving related parties. The Conflicts Committee bears a significant responsibility to ensure that all unitholders' interests are protected and that the process is fair and transparent.

Regulators and unitholders alike may scrutinize this process closely, particularly if the Conflicts Committee continues to resist engagement with alternative bidders offering a substantial premium. The committee's actions in the coming days will be important in determining whether they are fulfilling their fiduciary duties to all unitholders.

M&A Strategist

This situation presents an intriguing M&A scenario with several strategic implications:

• Competitive Bidding: Nut Tree and Caspian's increased offer has effectively initiated a bidding war, potentially driving up the acquisition price for MMLP. This could benefit unitholders but may strain the financial capacity of potential acquirers.
• Strategic vs. Financial Buyers: MRMC, as a strategic buyer, may have synergies that allow it to justify a higher price. However, Nut Tree and Caspian, as financial buyers, seem to see untapped value in MMLP that could be realized through financial engineering and operational improvements.
• Due Diligence: The bidders' request for due diligence access is standard in M&A processes. Their suggestion that the offer could increase post-diligence is intriguing but also carries the risk of a reduced offer if they uncover unfavorable information.
• Transaction Structure: The mention of potential "alternative transaction structures" suggests that Nut Tree and Caspian may be open to creative deal structures that could unlock additional value for unitholders.
• Hidden Asset Value: The reference to MMLP's undeveloped land in Beaumont, TX as a "hidden asset" indicates potential for value creation that may not be reflected in current market valuations or MRMC's offer.

The Conflicts Committee's strategy in managing this process will be crucial. Their reluctance to engage with Nut Tree and Caspian could be seen as a defensive tactic, possibly to maintain negotiating leverage with MRMC or to explore other options. However, this approach risks alienating unitholders if a significantly higher offer is not seriously considered.

As this situation unfolds, we may see further developments such as revised offers, legal challenges, or activist investor involvement. The outcome will likely hinge on the Conflicts Committee's ability to navigate these complex dynamics while fulfilling their fiduciary duties to all unitholders.

07/29/2024 - 02:00 PM

Enhanced Offer Represents a 48% Premium to Martin Resource Management Corporation's Proposal, Which Significantly Undervalues MMLP and its Future Prospects

Despite Repeated Requests and Superior Value Being Offered to MMLP Unitholders, Martin Midstream GP LLC's Conflicts Committee Refuses to Meet with Nut Tree and Caspian Directly

Nut Tree and Caspian Call on Conflicts Committee to Act in Best Interests of All MMLP Unitholders by Meeting with Nut Tree and Caspian and Requiring Approval of the Majority of Unaffiliated Unitholders for Any Transaction with Martin Resource Management Corporation

NEW YORK, July 29, 2024 /PRNewswire/ -- Nut Tree Capital Management L.P. ("Nut Tree") and Caspian Capital L.P. ("Caspian"), today sent a letter to the Conflicts Committee of the Board of Directors (the "Conflicts Committee") of Martin Midstream GP LLC (the "General Partner") notifying the Conflicts Committee of an increase to their fully financed offer to acquire Martin Midstream Partners L.P. ("MMLP" or the "Partnership") (Nasdaq: MMLP) for $4.50 per common unit in cash. This increased offer from the initial offer of $4.00 represents a 48% premium over the $3.05 per common unit offer made by Martin Resource Management Corporation ("MRMC") on May 24, 2024.

Nut Tree and Caspian believe their improved proposal is vastly superior to MRMC's proposal, which significantly undervalues MMLP and its future prospects, and that the MMLP unitholders who are unaffiliated with MRMC will find Nut Tree and Caspian's proposal more compelling, while providing equal or greater transaction certainty. With this increased offer, Nut Tree and Caspian maintain that they should be provided the opportunity to meet directly with the Conflicts Committee regarding their offer.

The full text of the letter is below:

July 29, 2024

Martin Midstream GP LLC
4200 Stone Road
Kilgore, Texas 75662
Attention: Byron Kelley, Chair of Conflicts Committee

Dear Members of the Conflicts Committee:

Nut Tree Capital Management L.P. ("Nut Tree") and Caspian Capital L.P. ("Caspian"), on behalf of certain funds and co-investors each advises or manages, are writing to the Conflicts Committee of the Board of Directors (the "Conflicts Committee") of Martin Midstream GP LLC (the "General Partner") to notify you in writing of our decision to increase our fully financed offer to acquire Martin Midstream Partners L.P. ("MMLP" or the "Partnership") to $4.50 per common unit in cash. This offer represents a 12.5% increase over our initial offer of $4.00 per common unit made on June 21, 2024, and a significant, 48% premium over Martin Resource Management Corporation's ("MRMC") $3.05 per common unit offer made on May 24, 2024. With this increased offer, we maintain that we should be provided the opportunity to meet directly with the Conflicts Committee regarding our offer in order to structure a transaction that would greatly benefit MMLP common unitholders.

Our decision to increase our offer is based on our own financial analysis of publicly available information regarding MMLP, its recent results, and current peer valuations. We further note that we may even be able to provide additional value for the Partnership's unitholders, subject to the findings of customary due diligence on the Partnership, should we be permitted to do so. In any event, we are confident that our improved proposal is vastly superior to MRMC's proposal, and that the Partnership's unitholders who are unaffiliated with MRMC will find our proposal more compelling, while we also provide equal or greater transaction certainty.

We are disappointed that despite our repeated requests, the Conflicts Committee has refused to meet with us directly, offering up only a meeting with its financial advisor, nor has the Conflicts Committee committed to requiring that any transaction with MRMC be subject to the approval of a majority of the unaffiliated common unitholders (that is, a vote that excludes the units held by MRMC, the General Partner, Ruben Martin, III, and any of their affiliates). We believe these steps are necessary to mitigate the conflicts of interest presented by MRMC's pending offer and to provide common unitholders with assurances regarding the integrity of the process being run by the Conflicts Committee. Nevertheless, we remain committed to constructive engagement with the Conflicts Committee to obtain its support, and ultimately to reach a negotiated, definitive agreement to acquire MMLP.

We have dedicated considerable time and effort to conduct our financial analysis of MMLP and ascertain an appropriate valuation, which supports our superior offer. We believe that MRMC significantly undervalues MMLP and its future prospects. In making these determinations, we considered the following:

• Comparable master limited partnerships, as described in MMLP's own publicly available investor presentation from May 2024, traded at approximately 8.5x expected 2024 EBITDA, whereas MRMC's offer represents an Enterprise Value of only 4.8x management's expected 2024 EBITDA. Furthermore, when referencing the same peers and the most recent equity research, that multiple has improved to 9.0x. At a 9.0x multiple, MMLP's common units would be valued 500% of what MRMC has offered.¹

• Curiously, the slides that discuss these relative valuations were recently removed from MMLP's publicly available Investor Relations website. Fortunately, we saved a copy of those slides and have pasted them below.

• In prior discussions we have had with members of management, we have been told repeatedly that management believes the Partnership's common units are undervalued and should trade more in line with EBITDA valuation multiples of similar companies.

• Based on the Partnership's own public disclosures, we are convinced that a number of positive developments for the Partnership are likely to come to fruition in the near and medium term, which will not only result in distributable cash flow above $1.00/common unit annually, but also likely result in significant actual cash distributions to common unitholders-—potentially as early as 2025. 

• We use management's 2024 distributable cash flow projection made in May of $29 million, or $0.74/unit, as a starting point, and expect that updated projections for increased maintenance capital expenditure of $3.3 million are offset by $2.0 million of non-recurring expenses in 2024 related to accidents and returns on $6 million of higher growth capex projects.

• • MMLP has funded all but $3 million of its expected $27 million of capital expenditures in its DSM Semichem LLC joint venture, which it expects will contribute over $6 million annually to profitability or roughly $0.16/unit.  This project is also likely to add to MMLP's Land Transportation volumes and has upside from increased semiconductor manufacturing activity in the United States.²

• • MMLP has an accretive debt refinancing opportunity coming soon, when $400 million of expensive 11.5% bonds become callable beginning August 15, 2025. The bonds currently trade at a yield below 8.0%, and we expect can be refinanced at 9.0%. This would save an incremental $10 million per year or $0.26/unit of interest savings. Netting costs to finance the call premium and fees may bring this to roughly $5 million per year or $0.12/unit.

• • Even with MMLP's current debt it is likely to be able to pay distributions to unitholders in the near term. MMLP reached its target leverage ratio of 3.75x at the end of 2023 and ended 2Q24 at 3.9x. Below 3.75x, a level we believe the company will reach sustainably in the near term, the current debt allows for distributions to unitholders.

• • Equity research indicates that most midstream companies pay distributions of 45-70% of distributable cash flow, implying possible annual distributions of $0.45-0.70/unit. MMLP's results are highly stable with 73% of MMLP's 2024E EBITDA coming from Service and Fixed Fee contracts. As a result, we expect MMLP could pay out on the higher end of distribution rates.³

• • Furthermore, the same equity research shows Midstream MLP distribution yields average 6.7%, which would imply a value of approximately $6.50-10.50/unit.⁴

• Additionally, management has previously discussed with investors MMLP's "hidden asset value" in the form of 98 acres of owned and undeveloped land in and around Beaumont, TX that could support another specialty industrial site.  In addition to the land being in close proximity to three different rail facilities, it also provides access to at least one deepwater dock large enough to accommodate a natural gas carrier.  We do not believe MRMC's offer attributes any value to this land.

As previously communicated, we stand ready to enter into an appropriate confidentiality agreement and commence our due diligence immediately and on an expedited basis following genuine and direct engagement with the Conflicts Committee regarding our offer. Depending on the outcome of that diligence, we may be able to increase our proposed purchase price or determine alternative transaction structures that could lead to even greater value for the Partnership's unitholders.

We continue to have committed and available capital to support this increased offer and can confirm that the definitive agreements would not include a financing condition.

We look forward to receiving a prompt response from the Conflicts Committee and directly discussing our offer further.

Sincerely,

Nut Tree Capital Management, LP Jed Nussbaum Chief Investment Officer Scott Silver Principal

Caspian Capital LP David Corleto Partner Meagan Bennett Managing Director

Latham & Watkins LLP and Olshan Frome Wolosky LLP are serving as legal counsel to Nut Tree and Caspian.

About Caspian Capital LP
Caspian Capital LP, founded in 1997, is focused on performing, stressed, distressed corporate credit, and value equities. Caspian currently oversees $4 billion in assets under management.

About Nut Tree Capital Management LP
Nut Tree Capital, founded in 2015, implements a fundamentals-based strategy focused on distressed credit, stressed/event-driven credit and value equities. Nut Tree currently oversees $4 billion in assets.

Media Contacts:
Jonathan Gasthalter/Nathaniel Garnick
Gasthalter & Co.
(212) 257-4170

¹ See Wells Fargo Midstream Energy Update July 12, 2024, pg. 7. Permission to use the Wells Fargo Midstream Energy Update was neither sought nor obtained.
² See MMLP's Quarterly Report on Form 10-Q for the Quarter ended June 30, 2024 and May 2024 Investor Presentation
³ See Wells Fargo Midstream Monthly Outlook July 3, 2024, pg. 89. Permission to use the Wells Fargo Midstream Monthly Outlook was neither sought nor obtained.
⁴ See Wells Fargo Midstream Monthly Outlook July 3, 2024, pg. 9. Permission to use the Wells Fargo Midstream Monthly Outlook was neither sought nor obtained.

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SOURCE Nut Tree Capital Management and Caspian Capital

FAQ

What is the new offer price for MMLP from Nut Tree and Caspian?

Nut Tree and Caspian have increased their offer to purchase Martin Midstream Partners L.P. (MMLP) to $4.50 per common unit in cash.

How does the new offer compare to MRMC's proposal for MMLP?

The new offer of $4.50 per unit represents a 48% premium over Martin Resource Management 's (MRMC) previous proposal of $3.05 per unit for MMLP.

Why do Nut Tree and Caspian believe their offer for MMLP is superior?

Nut Tree and Caspian believe their offer is superior because it significantly values MMLP higher than MRMC's proposal, reflecting MMLP's future prospects and potential for increased distributable cash flow.

What is the Conflicts Committee's response to Nut Tree and Caspian's offer for MMLP?

According to the press release, Martin Midstream GP 's Conflicts Committee has refused to meet directly with Nut Tree and Caspian despite repeated requests.

What potential financial improvements does the press release mention for MMLP?

The press release mentions potential for distributable cash flow above $1.00/common unit annually, contributions from the DSM Semichem joint venture, and an opportunity for accretive debt refinancing in August 2025.