Exclusive: Activist Sandell urges strategic action on DCP Midstream


Activist investor Sandell Asset Management is urging Spectra Energy Corp to swap its interest in DCP Midstream Partners LLC for equity in Phillips 66's master limited partnership (MLP) in a deal meant to improve the valuation of the companies, according to a letter seen by Reuters.

Sandell, which owns less than 1 percent of pipeline company Spectra and 1 percent of refining company Phillips 66, said in a letter dated October 2 it believes DCP's assets are a better fit with Phillips. DCP is jointly owned by Spectra and Phillips 66.

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The asset management firm has recommended to the leadership at both companies that Spectra transfer its 50 percent interest in DCP to Phillips' master limited partnership (MLP), Phillips 66 Partners LP . In exchange, Spectra will receive equity in the Phillips partnership in a tax-free transaction, according to the letter.

"The industry has been in this race to increase scale and simplify corporate structure and reduce the cost of capital," said Shreyas Gupta, portfolio manager at Sandell.

"It feels like Spectra has been at the finish line, trying to figure out what color sneakers to wear. They've been very slow in the whole process."

Spectra and Phillips 66 declined to comment on the proposed transaction but said in a statement that they regularly look for ways to enhance the value of DCP Midstream.

U.S. energy companies that own the infrastructure needed to process and move oil and gas frequently form MLPs, structures favored by energy companies for tax efficiency and a lower cost of capital.

The letter marks the second time since June that Sandell has pressed Spectra for changes. Sandell said in the earlier letter that it believes Spectra is undervalued and should trade around $48 per share, 33 percent above its Friday closing price of $35.95.

Last week, Devon Energy Corp said it would combine most of its U.S. pipeline and processing businesses with those owned by Crosstex Energy Inc and Crosstex Energy LP to form a new midstream company.

The new business will consist of two publicly traded companies, a MLP and a general partner that will control it. Devon will have a controlling stake in both entities.

(Reporting By Anna Driver; Editing by Terry Wade and Diane Craft)