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In early May, two large master limited partnerships with extensive footprints in the booming North American shale gas industry agreed to a $7 billion merger that could have major implications for the entire sector. Kansas City-based Inergy (NYSE: NRGY) and Houston-based Crestwood Midstream Partners (NYSE: CMLP) look poised to tie the knot by the end of the third quarter of 2013. Although some shareholders who are unhappy with the proposed price have threatened legal action to halt the deal, it seems likely that it will eventually go through in some form.

Since this deal involves the merger of two key players in the natural gas storage and transportation sectors, it could have far-reaching implications for many other master limited partnerships and natural gas extraction firms. Even those investors who might normally remain on the sidelines for a deal like this would do well to determine how the tie-up might affect their other holdings.

Crestwood Midstream Partners and Inergy

Crestwood and Inergy both provide gas-field services, storage and transportation to drilling and exploration companies across the United States. They have extensive pipeline networks and storage facilities that play an integral role in the ongoing development of the native gas industry. What's more, they are both continuing to build out their networks in preparation for further development.

While Crestwood and Inergy operate in distinct areas of the United States, both of their home territories are rich in shale gas resources. For its part, Inergy maintains a robust storage and transportation infrastructure in the Marcellus Shale region of Pennsylvania and New York State. The bulk of its pipeline and storage facilities are located here, and the company primarily serves utility customers in neighboring northeastern, mid-Atlantic and Rust Belt states.

Meanwhile, Crestwood operates in a number of mid-continental locations, including the Barnett Shale of northern Texas, the Bossier Shale of Louisiana and the Fayetteville Shale of Arkansas. It also has pipelines and other infrastructure in southeastern New Mexico and northern West Virginia. Its pipeline network spans nearly 1,000 miles. With notable exceptions like the Bakken Shale and the Monterrey Shale, these two partnerships have a hand in much of the natural gas production that currently occurs in the United States.

Comparisons with the Competition

It might be helpful to compare these two firms with a similar firm that also engages in midstream support services, Martin Midstream Partners (NASDAQ: MMLP). Compared to Inergy and Crestwood, Martin's market capitalization of $1.1 billion appears paltry. Relative to its 2012 earnings of about $28 million on gross revenue of $1.5 billion, Inergy's take of about $560 million on revenue of $1.8 billion and Crestwood's earnings of about $17 million on revenue of $214 million look favorable as well. However, Martin Midstream did see earnings growth of nearly 900 percent during the most recent quarter. Compared to Crestwood's 60 percent decline, this makes the firm look significantly more attractive.

It is important to note that Martin Midstream does not directly compete with either of these firms in their core areas of operation. Although the company does operate some pipeline mileage, much of its activity involves storage and marine transportation.

Deal Structure

Since the two parties to this deal are MLPs that provide gas field support as well as transportation and other infrastructure services, it will be quite complex. Ultimately, Crestwood aims to take majority control of Inergy and move the combined partnership's headquarters to Houston. The end result will see Inergy's shareholders will get the better end of the deal; the completed transaction will see that they will own more of the combined firm than Crestwood's former common stockholders.

To execute the deal, Crestwood will assume control of Inergy's "general partner" and distribute units of Inergy stock to all Crestwood shareholders as of a yet-to-be-determined record date at a ratio of 1.07-to-one. Simultaneously, Crestwood shareholders will receive payments of $1.03 per unit. On a respective basis, Crestwood and Inergy will kick in $25 million and $10 million to cover the cost of this distribution.

It should be noted that Inergy Midstream Partners (NRGM), a wholly-owned subsidiary of Inergy L.P., will play a central role in this transaction. Upon completion of the transaction, the subsidiary's unitholders will own nearly 20 percent of the new partnership. Meanwhile, Inergy's own unitholders will own nearly 30 percent of the entity. Crestwood Midstream's current unitholders will enjoy ownership of about 14 percent of the company, and the two merging entities themselves will own the bulk of the remaining shares.

Monopoly Worries and Potential Complications

This deal has already attracted the attention of shareholder's-rights advocates who argue that it substantially undervalues its components, and it is entirely possible that it will need to be reworked before its completion.

More importantly, some market-watchers worry that this transaction sets up the possibility of a quasi-monopoly in the midstream shale gas business as the combination will involve a substantial amount of the overland natural gas distribution infrastructure in the south-central and eastern United States. What's more, the combination of Inergy's close relationships with several large utility companies and Crestwood's favorable agreements with drilling and extraction firms could lead to a vertically integrated arrangement that raises the cost of natural gas for end-users. In spite of this, few market-watchers seem to be talking about the possibility of enhanced regulatory scrutiny or approval delays.

In sum, this deal offers a unique opportunity for investors to profit from the continuing North American shale gas boom. Further information on how to play natural gas can be found here. The two partnerships provide exposure to the space without the volatility and risk associated with pure-play drilling and exploration firms. At the same time, potential legal actions and the potential for a quasi-monopoly in certain parts of the country might give investors pause. Although the best way to play this deal may be through a long position in Inergy, investors are advised to conduct their own due diligence before proceeding.
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