UPDATE: Business as Usual for Retail in Sunoco-ETP Merger

PHILADELPHIA -- Energy Transfer Partners' CEO Kelcy Warren admits that branching out to retail was not part of the company's game plan, but its $5.3-billion deal to take Sunoco Inc. gives ETP approximately 4,900 retail locations and that's OK.

"We would not have targeted a retail business to a strategic move for the company; however, it is part of the overall package," Warren said this morning in a Sunoco-ETP joint conference call. "We believe it is extremely well run. We think the cash flows are very sustainable and it is a very good business. We are happy to have it and committed to the business. We will continue to grow it and manage it with the people who have been doing that so well for quite a while."

According to Martin Salinas, ETP's CFO, the Dallas-based firm felt it needed to diversify its business so it was not "overly subjected" to natural gas basis risk. Also, he said, its customers were demanding more NGL (natural gas liquids) capabilities.

"This deal is certainly transformational for us. In addition to diversification, a key driver behind the strategic rationale for this transaction is our customers' desire for a fully integrated midstream company," Salinas explained. "The acquisition of Sunoco provides an attractive platform to our NGL service capabilities while expanding into the crude and oil refined products of the business. We believe Sunoco Logistics has a best-in-class transportation, terminaling and logistics business and the complementary nature of our existing asset base combined with announced organic growth projects will further our ability to provide our customers with integrated midstream solutions."

He added that both companies will benefit from growth opportunities realized through greater scale, increased geographic reach and a broader, more diversified business platform.

But why now? As Salinas explained, Sunoco's decision last September to exit the refining business made it the "optimal time for a transaction." He added ETP supports Sunoco's existing plans to exit the refining business and its discussions with The Carlyle Group about a possible refinery joint venture.

Both ETP and Sunoco anticipate minimal disruption as the two companies move toward integration. Sunoco Logistics, according to Salinas, will remain a separate publically traded Master Limited Partnership (MLP) and will stay in place to minimize business disruption while streamlining integration and accelerating value creation.

Sunoco CEO Brian MacDonald added that the company's retail and logistic business will continue to be based in the Philadelphia region, consistent with the current operating presence.

"As we bring Sunoco and ETP together we expect minimal integration risk and disruption for our employees given that key Sunoco and Sunoco Logistics managers will remain in place," MacDonald explained. "Our commitment to the area remains unwavering and will continue to have a key presence in the region."

He further explained, that with all the changes Sunoco has undergone in the past four years, the company is in a good position now.

"Overall, we have become a much stronger, more focused company as a result of these actions narrowing in on our logistics and retail operations. Our retail business benefits from strong returns, stable cash flows, iconic brand recognition and owned real estate in key locations throughout the east coast to the Midwest and the southeast. Sunoco Logistics offers excellent assets in desirable locations and provides steady ratable cash flows and has significant growth potential within the NGL and oil industries," he added.

The integration and approval process is expected to take four to six months, meaning the deal will close somewhere in the third or fourth quarter of this year, Salinas said. ETP is currently putting together an integration team and an integration plan will be developed immediately so that by closing "we are one functioning organization," he added.

The transaction is not subject to financing or ETP unit holders' approval and the companies do not anticipate any regulatory issues, thereby providing the highest level of deal certainty, Salinas added.

However, a few hours after the deal made headlines, the law firm of Levi & Korsinsky LLP said it is launching an investigation of the Sunoco board of directors for possible breaches of fiduciary duty and other violations of state law in connection with the sale.

Specifically, the law firm's investigation concerns whether the board breached its fiduciary duties to Sunoco stockholders by failing to adequately shop the company before entering into the deal and whether ETP was underpaying for Sunoco shares.