ONEOK (OKE) is Funding a $4.4B Acquisition With a $9B Minority Investment. Is the 7% Capped Return Attractive?

ONEOK, Inc. (NYSE: OKE ) agreed to acquire Brazos Midstream's Permian Midland Basin assets for $4.425 billion in cash. A $9 billion nonvoting minority equity investment from Apollo-managed funds will fund the acquisition and support approximately $5 billion of debt extinguishment. ONEOK, Inc. (NYSE:OKE) expects pro forma 2027 leverage to decline to approximately 3.25 times debt-to-EBITDA without common-share issuance.

The minority investor's internal rate of return, or IRR, is capped at 7.0% for nine years, below what ONEOK, Inc. (NYSE:OKE) describes as its cost of publicly traded equity. The cap applies to total return over time, not a fixed annual cash coupon.

Apollo-managed funds will receive a Class B interest in a new holding company. The interest is subordinate to senior debt, has no board representation or liquidation preference, and carries limited consent rights. A quarterly distribution below the capped return carries no penalty.

The Class B interest is expected to receive 15% of quarterly cash flow from operating-company activities. Distributions will vary with cash flow, and amounts above the 7% capped IRR will reduce the investor's capital balance. ONEOK, Inc. (NYSE:OKE) can elect to distribute up to 20% under certain conditions to accelerate repayment. ONEOK, Inc. (NYSE:OKE) may acquire the remaining interest after eight years, or earlier if the balance falls to $200 million.

Approximately 600,000 dedicated acres are covered by fixed-fee contracts with a weighted average remaining term exceeding 12 years. Including plants under construction, the acquisition more than doubles ONEOK, Inc. (NYSE:OKE)'s Midland Basin processing capacity to approximately 2.3 billion cubic feet per day.

ONEOK, Inc. (NYSE:OKE) expects immediate earnings-per-share accretion. The structure reduces debt without increasing the common-share count, while value above the capped return accrues to common shareholders.

Avoiding common-share issuance does not eliminate the competing claim on cash flow. The Class B interest participates in ONEOK, Inc. (NYSE:OKE)'s existing operations rather than only the acquired assets. A calculation using the initial $9 billion balance and 7% cap produces an annualized figure of approximately $630 million, although cash distributions may be higher as capital is returned.

The target IRR increases to 7.35% in year 10 and reaches 7.85% in year 15 if a balance remains.

The acquisition valuation depends on execution. ONEOK, Inc. (NYSE:OKE) uses company-defined non-GAAP adjusted EBITDA, meaning earnings before interest, taxes, depreciation, and amortization, further adjusted under its methodology. ONEOK, Inc. (NYSE:OKE) did not provide a forward GAAP reconciliation because it said doing so would require unreasonable effort.