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Exclusive: Activist investor Sandell urges swap on DCP Midstream

By Anna Driver

HOUSTON (Reuters) - 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 valuations 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 believed DCP Midstream's assets are a better fit with Phillips. DCP Midstream is jointly owned by Spectra and Phillips 66.

Asset management firm Sandell has recommended to executives at both companies that Spectra transfer its 50 percent interest in DCP Midstream to Phillips' master limited partnership (MLP), Phillips 66 Partners LP . In exchange, Spectra would 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, senior managing director and portfolio manager at Sandell.

Spectra and Phillips 66 declined to comment on the proposed transaction but said in a statement 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 marked the second time that Sandell has pressed Spectra for changes. It said in a letter in June it believed Spectra was undervalued and should trade at about $48 per share, 33 percent above its Friday closing price of $35.95.

Spectra rose 0.4 percent to $36.08 in Monday morning New York Stock Exchange trading, while Phillips 66 added 1.2 percent to $64.12.

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, Diane Craft and Jeffrey Benkoe)

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