Martin Midstream Partners: Martin Resource Management may need to increase its offering

Martin Midstream (NASDAQ:MMLP) is currently the focus of two separate non-binding offers. One of the offers is a $3.05 per unit cash offer from Martin Resource Management Corporation, and the other is a $4.50 per unit Cash offer from Nut Tree Capital Management and Caspian Capital.

From Martin Second quarter 2024 results were solid, with adjusted EBITDA slightly exceeding expectations despite a negative impact of more than $2 million from a pair of accidents.

This reinforces my belief that Martin's intrinsic value is around $4.35 per unit (based on its projected net debt at the end of 2024), while it could reduce its net debt by $1 per unit in 2025.

Negotiations are still ongoing, but I can imagine a plausible scenario where Martin Resource Management Corporation increases its offer to $4.00 to $4.50 per unit and a deal is reached in late 2024. early 2025.

Current Offers

Nut Tree Capital Management and Caspian Capital have increased their offer for Martin Midstream's common units to $4.50 in cash in July 2024. They had previously made a cash offer of $4.00 per unit in June 2024.

Martin Resource Management Corporation (which owns Martin Midstream's general partner through subsidiaries) made a cash offer of $3.05 per unit in May 2024. The Q2 2024 earnings call mentioned that negotiations were underway between Martin Midstream Partners' Conflicts Committee and Martin Resource Management Corporation's advisory firm. However, no timeline for completion of these negotiations was specified (although they could also fail).

Martin Resource Management Corporation indicated that it was only interested in acquiring all of the outstanding common units of Martin Midstream and that it was not interested in selling its interest in Martin Midstream or pursuing other strategic alternatives.

Martin Resource Management Corporation beneficially owns approximately 26% of Martin Midstream's common units, including the amount owned by Ruben Martin III.

I recall another example where an MLP was acquired by its general partner. Blueknight Energy Partners received an offer from its general partner Ergon in October 2021 and ultimately accepted an improved offer from its general partner in April 2022, six and a half months later.

A similar timeline would result in some news in December 2024, although each situation is different.

Accident costs

Martin’s second quarter 2024 results were impacted by a pair of accidents that occurred during the quarter. Martin’s marine transportation division had a $0.5 million casualty loss reserve due to a May 2024 bridge collision (an accident involving only one moving object) in Galveston, Texas. The Galveston IncidentA tugboat lost control of a pair of barges and one of Martin's barges ended up colliding with and damaging a bridge. The $0.5 million represents the sum of two related insurance deductibles.

In addition to the $0.5 million casualty loss reserve, Martin's marine transportation division also saw lower fleet utilization due to the collision.

Martin's Terminals and Storage division suffered a negative impact of $1.5 million Crude oil spill from the pipeline connecting Martin's Sandyland terminal to its Smackover refinery.

The spill was estimated to be less than 2,500 barrels of oil, and the $1.5 million represents insurance deductibles.

Second quarter 2024 results

Martin Midstream’s second quarter 2024 results were strong, generating $31.7 million in Adjusted EBITDA versus guidance of $31.2 million in Adjusted EBITDA. This was despite the impact of more than $2 million from the accidents.

Martin's sulfur services division rebounded after some challenges in the first quarter of 2024, while Martin's ground transportation division continued to be strong.

Martin's marine transportation division missed its EBITDA guidance by $0.9 million, attributable to $0.5 million in insurance deductibles and business interruptions caused by the accident.

Martin's Terminalling and Storage division's results were $1.4 million below its EBITDA forecast, and this can be attributed to $1.5 million in insurance deductibles related to the oil spill.

Notes on valuation

I previously valued Martin at around $4.35 per unit based on a 2025 EV-to-adjusted EBITDA multiple of 5.0x, along with $425 million in net debt at year-end 2024.

Martin’s business results are generally tracking expectations, so the estimated value remains unchanged for now. Martin’s first half 2024 EBITDA ended approximately $0.6 million below its initial guidance, but was also impacted by $2.0 million in accident-related charges.

If Martin does not increase its distribution, it looks potentially capable of reducing its net debt by $1 per unit (about $40 million) in 2025. This would make its value approximately $5.35 based on a similar multiple and $385 million in net debt at the end of 2025.

Assuming Martin's business performs as currently expected for the remainder of 2024 and 2025, it would likely be more costly for Martin Resource Management Corporation to submit a future offer if it ends negotiations without an agreement.

Given that the current offer of $4.50 from Nut Tree Capital Management and Caspian Capital is 48% higher than Martin Resource Management Corporation's original offer of $3.05, it also seems quite unlikely that the original offer of $3.05 can justifiably be accepted.

Since Martin Resource Management Corporation is not interested in selling its units, alternative offers are unlikely to be accepted unless a substantial overpayment is involved.

Martin Midstream could potentially justify accepting an offer from Martin Resource Management Corporation that at least matches the first offer from Nut Tree and Caspian Capital.

Therefore, I think there is a good chance that Martin Resource Management Corporation will increase its offer and that an agreement will ultimately be reached in the range of $4.00 to $4.50 per unit in late 2024 or early 2025.

That would be relatively fair (compared to my estimated value for Martin) and would still allow Martin Resource Management Corporation to reap the benefits of the projected increase in free cash flow next year.

Conclusion

Martin Midstream has received a competitive offer that is now 48% higher than Martin Resource Management Corporation's original offer. Martin Resource Management Corporation's close ties to Martin Midstream mean that a competitive offer is unlikely to be accepted unless a substantial overpayment has been made.

The competing offer means that Martin Resource Management Corporation will likely need to increase its offer if it wants to close a deal. I estimate Martin Midstream's fair value at around $4.35 per unit based on its projected net debt at the end of 2024, and I believe that an offer of $4.00 to $4.50 per unit from Martin Resource Management Corporation would be sufficient to close a deal.