One of the first deals signed by Blackstone’s Saudi Arabia-backed infrastructure fund appeared to investors to be in jeopardy on Monday, after the kingdom’s oil price war caused a collapse in the shares of US pipeline company Tallgrass Energy.
The Blackstone fund, unveiled during President Donald Trump’s inaugural foreign trip to Riyadh in 2017, agreed to buy Tallgrass for $22.45 a share in cash, valuing the company at $6.33bn.
But while the stock had traded close to that offer price since the deal was announced in December, it suddenly fell on Monday by as much as 33 per cent. By the close on Wall Street the stock was changing hands at $17.98, down more than 12 per cent.
Analysts said the decline pointed to uncertainty about Blackstone’s intentions. “I wouldn’t be surprised if Blackstone is looking for a loophole to back out, or revise the price,” said Stephen Ellis, an analyst at Morningstar. “The market clearly thinks this is likely.”
Blackstone faces a financial penalty if it walks away from the deal, according to regulatory filings on the terms of the deal, which would apply even if the value of Tallgrass is hammered by an economic downturn or act of war. That penalty is capped at $70m, however — far less than the $800m wiped off the value of Tallgrass’s listed A shares on Monday.
If Blackstone was to scotch the deal or seek to alter its terms, it would be an early sign of collateral damage to Saudi Arabia’s own investment portfolio from its decision on Sunday to increase crude production and slash prices, which triggered a crash in the oil price.
“We intend to continue to comply with our obligations under the merger agreement,” Blackstone told the Financial Times on Monday, adding that it was working to complete the steps required before a Tallgrass shareholder meeting on April 16.
Blackstone’s infrastructure fund was originally pitched as a way to pump funds into the US economy’s ageing physical backbone and was announced with up to $20bn of financial backing from Saudi Arabia.
The Tallgrass acquisition was among the fund’s first deals, and promises to put Stephen Schwarzman’s group in control of major pipelines including the Pony Express, which feeds crude from wells in the western US to the massive tank complex at Cushing, Oklahoma.
Analysts say that energy transmission networks are vulnerable to the economic fallout from depressed oil prices, which would force US shale operators to slash production. The price of West Texas Intermediate crude at Cushing was $32.19 a barrel on Monday, down 22 per cent from last week.
About 10 per cent of Tallgrass Energy’s $868.5m in 2019 revenue came from Continental Resources, the largest oil producer in the Bakken shale region of North Dakota and Montana, whose shares were down 47 per cent on Monday. “The loss of this customer could have a material adverse effect on our financial results,” Tallgrass said in its most recent annual report.