Never buy a takeover candidate you wouldn’t want to own if there’s never an offer. Following this rule ensures you won’t cash in on every deal that comes down the pike. But neither will you ever be stuck with a pile of stinking junk, hoping a “greater fool” will come along to take it off your hands.

Happily, publicly traded general partners (GP) now offer both high quality and high probability of landing lucrative takeover offers. The reason: Related limited partners (LP) are taking them in house to boost long-term growth potential and strengthen balance sheets.

As my co-editor Elliott Gue wrote in the June 18, 2010, MLPP article The General Partner’s Take, GPs are basically part manager and part parent. The GP manages the assets and makes all major business decisions, such as acquisitions and construction plans. In return, it collects fees per a set partnership agreement drawn up at the LP’s inception.

GP fees are typically in the form of incentive distribution rights (IDR), a percentage of cash flow that’s pegged to the quarterly distribution paid to LP owners. IDRs ratchet up when the LP’s distribution is hiked. That gives the GP a healthy incentive to boost LP owners’ distributions. On the other hand, it also means the higher the distribution goes, the greater the burden the GP’s take is on the LP’s growth.

Over the past couple years several GPs have altered their IDR structures to lighten the load. Enterprise Products Partners LP (NYSE: EPD) was among the first to make substantial changes, reducing the percentage share of future distributions. And since then others, like Sunoco Logistics Partners LP (NYSE: SXL), have taken similar steps.

GP takeovers–which move management in house and do away with IDRs–represent the latest moves in this direction. General partners for the vast majority of the master limited partnerships (MLP) listed in our How They Rate coverage universe are large corporations. Sunoco Logistics’ GP, for example, is a wholly owned subsidiary of Sunoco Inc (NYSE: SUN). Williams Partners LP (NYSE: WPZ) is under the domain of Williams Companies (NYSE: WMB) and El Paso Pipeline Partners LP’s (NYSE: EPB) GP is wholly owned by giant El Paso Corp (NYSE: EP).

Even if these GP interests are bought out in coming months, there’s no way for investors to participate. A handful of GP interests, however, are publicly traded. They’re shown in our two tables “Takeovers in Progress” and “No Deal Yet.”

The first table shows six publicly traded GPs that have either been taken over already or else are in the process of being bought out. The second table identifies four publicly traded GPs tracked in How They Rate that have to date not received a takeover offer but are likely to.

These GP interests were launched as initial public offerings, mostly in the middle of the last decade. MLP rules had just been relaxed, allowing greater institutional participation for the first time. Meanwhile, as a small and generally niche corner of the stock market, MLPs were having a difficult time raising capital. The result was offering a portion of GP interests to the public as a way to raise additional funding.

Here in late 2010, however, MLPs are no longer having problems selling either equity or debt. And with distribution growth robust, IDRs have risen in tandem. As a result, some GPs’ rising share of cash flows threatens the growth of the overall enterprise–and that’s induced management to buy them out.

For GP unitholders the takeover record is a quite lucrative one. Of the three takeover deals that have already been completed, Kinder Morgan Inc is still the general partner for Kinder Morgan Energy Partners LP (NYSE: KMP) after management’s all-cash buyout in August 2006. Unitholders of the former Magellan Midstream Holdings, however, realized a 33.1 percent windfall gain from its takeover by Magellan Midstream Partners LP (NYSE: MMP).

Moreover, since the deal closed on Sept. 25, 2009, the Magellan Midstream Partners units they received have tacked on an additional 40 percent-plus return. The MLP’s growth has picked up, and management has boosted the distribution for the last two quarters, after four quarters of no growth.

Deals in Progress

Similar upside is likely for owners of the three GPs now in the process of being bought out by related LPs. All three deals follow the mold of the Magellan merger, with GP unitholders offered a swap to LP units. All three involve extremely successful MLPs with records of consistent distribution growth, which has increased the GP’s take of cash flow greatly in recent years.

Buckeye Partners LP (NYSE: BPL) has lifted its payout 25 consecutive quarters and by 5.5 percent over the past 12 months. Enterprise has raised its payout for 24 consecutive quarters and also by 5.5 percent over the past year. And Inergy LP (NYSE: NRGY) has boosted 6 percent over the last 12 months and has increased every quarter since inception, a record dating back to February 2002.

GPs for all three partnerships have enjoyed huge payout gains. Inergy Holdings (NYSE: NRGP), for example, has seen its distribution rise 30.8 percent over the past 12 months and 258 percent since inception in 2005. Enterprise GP Holdings’ (NYSE: EPE) payout is up 12 percent the past year and has doubled since its late 2005 launch. Meanwhile, Buckeye GP Holdings’ (NYSE: BGH) dividend has been boosted 21.6 percent the last 12 months and has also doubled since 2006 inception.

The impact of taking its GP private will clip Enterprise Products Partners’ distributable cash flow (DCF) by 1.5 cents per unit in 2010, a penny in 2011 and half a penny in 2012. That’s largely because of the greater number of units that will be in circulation, following the exchange of Enterprise Holdings’ 139.2 units for Enterprise Products units.

The effect, however, will be more than offset by the accretive impact of Enterprise Products’ aggressive capital spending plans, which will be enhanced by a simplified capital structure and stronger balance sheet after the deal closes later this year.

As a result, it won’t affect management’s policy of solid quarterly distribution increases.

Moreover, the current payout is covered by a solid 1.3-to-1 margin by DCF.

That’s a sizeable margin for error at a company whose revenues have proven themselves recession resistant under the worst possible circumstances in the energy industry (i.e. late 2008).

One of Enterprise Products’ most promising projects is a build-out of energy infrastructure in the emerging Eagle Ford Shale area through a pact signed with major independent EOG Resources (NYSE: EOG). Eagle Ford is primarily a wet gas find, meaning there are abundant natural gas liquids (NGL) to offset any continued weakness in natural gas prices.

As was the case with the TEPPCO Partners LP merger last year, this deal comes with the support of the Duncan family, whose EPCO interests own 76 percent of Enterprise GP Holdings. As part of the deal, they’ve agreed to waive distributions for the first five years after the merger’s close. That’s a strong vote of confidence for the ruling family and a good reason to buy Enterprise Products Partners LP whenever it trades at 38 or lower.

Enterprise GP Holdings trades at a slight discount to takeover value and rates a buy up to 57. That’s basically the value of 1.5 units of Enterprise Products Partners at my buy target of 38. Note that holders of the GP will get a further 50 percent plus dividend boost when the deal is completed. Enterprise common unit holders, meanwhile, will not also own the general partner interest in Duncan Energy Partners LP (NYSE: DEP), which itself might make the latter a takeover target. Buy Duncan Energy Partners LP up to 30.

Buckeye GP Holdings trades at a slightly larger discount to its takeover value of 0.705 units of Buckeye Partners. Buckeye GP Holdings is a buy up to 43, which is approximately the value of 0.705 units of the LP at a target buy price of 60.

Buckeye Partners’ revenue stream is also heavily fee-driven, mainly energy pipelines and storage, and is therefore steady in all environments. The GP merger is expected to deliver substantial savings in addition to structural and balance sheet simplification. That, in turn, should speed the company’s ongoing asset expansion, including the proposed Marcellus Union Pipeline project in alliance with Nova Chemicals focused on NGLs.

The upshot is further cash flow and distribution growth for Buckeye Partners going forward. The company also enjoys a very low cost of debt capital, with its unsecured bonds maturing in 2033 posting a yield-to-maturity of just 5.5 percent. Buckeye Partners LP is a buy up to 60.

Inergy LP draws only a B+ rating from S&P. But it, too, was able to issue cheap debt recently, selling $600 million of eight-year bonds with a yield to maturity of just 7 percent. That’s considerably less than the 8.75 percent coupon rate it has to dish out on debt maturing in March 2015 that it issued only a year ago. The LP was also able to upsize an equity offering this month to 10.25 million units from an originally planned 8.5 million units.

Such low-cost capital should ensure strongly accretive cash flow from Inergy’s acquisition of a natural gas storage facility in Texas for $725 million, also announced this month. That’s just the latest deal for this propane distributor and owner of midstream energy infrastructure and ensures continued distribution growth ahead.

Absorbing Inergy Holdings is likely to be at least slightly dilutive to cash flow in the near term, largely because of the addition of 47.7 million new LP units. Longer term, eliminating IDRs promises to further reduce the LP’s cost of capital and simplify structure, cutting costs and enhancing distribution growth that shouldn’t be interrupted in the near term. Certain senior management members in addition have agreed to take their distributions in kind, further limiting any near-term cash drain.

As for GP holders, they’ll see an immediate effective dividend increase of about 60 percent when the deal closes. And with the LP units down roughly 10 percent from the merger’s pre-announcement price–despite continued solid results and another distribution boost last month–there’s plenty of upside as well. Inergy LP is a buy up to 39. Inergy Holdings is a buy up to 30, the value of the takeover offer of 0.77 LP units.

Deals to Come

Of any type of merger, unions between general partners and limited partners encounter the fewest regulatory hurdles. For one thing, there are no issues about consolidation of industry assets and market power, as the deals are solely about the ownership structure of an existing base of assets.

All three deals are the subject of “investigations” by various legal entities for allegations of “possible breaches of fiduciary duty”–in other words, fishing expeditions to determine if there’s a legal claim to demand a higher takeover price. Such challenges have become virtually automatic for any merger announced in recent months. Given the heavy ownership by insiders of GPs and large premiums in these deals, however, none is likely to succeed, and all of these deals should close by the end of the year.

That should also prove true of any deal involving the four remaining independently traded GPs in How They Rate coverage, shown in the table “No Deal Yet.”

Moreover, any deal involving any of them should produce both a sizeable premium to their current unit prices and a hefty dividend increase.

We currently hold Penn Virginia GP Holdings (NYSE: PVG) in our Aggressive group. That’s because the LP providing all of its cash flows–Penn Virginia Resource Partners LP (NYSE: PVR)–depends on coal prices to drive royalties from its lands, as well as natural gas prices to move profits from its midstream energy business. The GP is, in fact, a higher octane bet on the LP, following its lead but with higher highs and lower lows.

Penn Virginia Resource Partners held its distribution at a quarterly rate of 47 cents per unit throughout the 2008-09 debacle thanks in large part to conservative financial policies. The distribution, however, hasn’t been increased since the November 2008 payment, which at that time was the seventh consecutive quarterly boost. The GP, in contrast, boosted the payout in May, the first boost since November 2008. To that point, it had boosted the distribution every quarter since its early 2007 inception.

That was in large part because of soft conditions in both the coal mining and natural gas midstream segments. Second-quarter results showed positive signs of better ahead, including a boost in coal royalties revenue per ton to $3.93 over $3.43 a year earlier.  Coal production also ticked higher and, while midstream gas throughput dropped, gross margin improved to 85 cents per thousand cubic feet, up from 67 cents.

That augurs better cash flows ahead, and more latitude to boost distributions at the GP and LP. As growth continues, it will become an ever-more compelling reason for Penn Virginia Resources to take its GP private. Meanwhile, Penn Virginia Corp (NYSE: PVA) has now divested its stake in Penn Virginia GP, which a year ago stood at 77 percent. As a result, Penn Virginia GP is now wholly independent, and in prime shape for a buyout.

Now up nearly 40 percent from our May 2010 recommendation, Penn Virginia GP Holdings is a buy up to 23. Penn Virginia Resource Partners is a buy on dips to 22 or lower.

Energy Transfer Equity (NYSE: ETE) has grown its distribution only slightly more than Energy Transfer Partners LP (NYSE: ETP), which hasn’t raised its payout since August 2008. One reason is the LP’s hefty capital spending plans, which now include constructing two major shale-focused pipeline systems. These should begin producing revenue in the first quarter of 2011 and accelerate growth thereafter.

Energy Transfer Equity’s biggest asset is its stake in Energy Transfer Partners. But thanks to a nifty deal inked earlier this year, it now also owns the general partner interest in Aggressive Holding Regency Energy Partners LP (NSDQ: RGNC). That gives it an aggressive play on infrastructure in some of the country’s fastest-growing shale plays in addition to continued steady income at Energy Transfer Partners.

Energy Transfer Equity holds 22 percent of Regency’s common units. That came at the cost of 12.3 million common units held in Energy Transfer Partners, which were retired in the deal. In return, Energy Transfer Partners moved 49.9 percent of its stake in the Mid-Continent Express Pipeline to Energy Transfer Equity, which dished it to Regency to complete the deal.

The deal is expected to be overall slightly dilutive to Energy Transfer Equity. Ultimately, however, it makes the GP more attractive as a potential takeover target for Energy Transfer Partners. Energy Transfer Equity’s share of Energy Transfer Partners’ cash flows is very similar to what Inergy Holdings’ share is of Inergy LP’s cash flows. And it will only increase as Energy Transfer Partners resumes distribution growth next year, once the Tiger Pipeline starts producing revenue.

Energy Transfer Partners units surged to a new post-2008 crash high in early August, only to crash back to the mid-40s in the wake of an over-subscribed equity unit offering. Now yielding around 7.5 percent, Energy Transfer Partners LP a buy up to 48. Energy Transfer Equity is a buy up to 38.

NuStar GP Holdings (NYSE: NSH) owns the 2 percent general partner interest and 15.5 percent of the equity units of NuStar Energy LP (NYSE: NS), as well as IDRs to the LP. NuStar’s cash flows are divided between two businesses: one of the largest refiners and marketers of asphalt, and the second-largest independent operator liquids terminals in the US, with operations also in the Netherlands Antilles, Canada, Mexico, the Netherlands and the UK.

Based on fees for service, the liquids terminals business is very steady and covers the LP’s distributions. It represents the original part of the business, mainly energy infrastructure supporting the refining operations of former parent Valero Energy Corp (NYSE: VLO). Asphalt refining and marketing, in stark contrast, is an exceptionally volatile business, with profit margins dependent on demand as well as the price of heavy oil.

Results at energy infrastructure depend on energy prices to the extent they affect pipeline rates. They’re expected to rise in coming quarters, however, thanks to series of acquisitions of top-quality assets. Ongoing projects include two tank expansions that are expected to accelerate cash flows by 2012.

For the past three years NuStar Energy LP has lifted its distribution once a year, reflecting the gradual growth of its energy infrastructure operations. The GP, in contrast, has boosted its payout in each of the last three quarters, a pace it’s expected to stick to going forward. That’s a clear sign that its IDR deal is starting to ramp up–the GP pulled down roughly half of cash distributions in the second quarter–and to make it more attractive as a takeover target.

After hitting a post-2008 crash high in April, NuStar Energy LP units have traded in a fairly tight range since June. The LP, however, has continued to advance its cause by raising low-cost capital and bringing its new projects on track. NuStar Energy LP is still a buy up to 65. NuStar GP, in contrast, has recently pushed to a new post-crash high. A buyout offer should fetch somewhat more than that, while ramping up distributions. Buy NuStar GP Holdings up to 33.

Alliance Holdings GP’s (NSDQ: AHGP) primary asset is a share of the growth of Alliance Resource Partners LP’s (NSDQ: ARLP) cash flows. The latter produces and markets coal in the US to a range of utilities and industrial users.

Even moreso than Penn Virginia Resource Partners, Alliance Resource Partners has been able to weather the tough times in the energy market, posting in August its ninth consecutive quarterly distribution increase. Before that, the payout was increased at least twice a year dating back to late 2003. The GP has also boosted its distribution nine consecutive quarters, though at a somewhat faster rate, including 12.9 percent the past 12 months versus 8.7 percent for the LP.

Both the LP and the GP are benefitting from continued global demand for coal, which is offsetting sluggish conditions in the US. Coal volumes were up 19.9 percent the past 12 months and the company signed several new contracts with a four-year duration. That’s superior to other coal mining companies and looks set to continue.

The LP recently touched a new all-time high, besting the mid-2008 peak in the wake of $150 per barrel oil. Ditto the GP, which may be benefitting from some speculation of a takeover bid. Coal, however, is hardly an over-heated industry and both could go substantially higher. Alliance Resource Partners LP is a buy up to 58. Buy Alliance Holdings GP up to 42.