Brookfield Infrastructure Partners LP is raising its hostile takeover bid for Inter Pipeline Ltd. to $19.75 a share, topping a surprise offer from Pembina Pipeline Corp. and giving Inter Pipeline shareholders wholly different options: Get paid in cash today, or take Pembina shares that will pay a much higher dividend over time.
Brookfield first announced its hostile bid worth $16.50 a share in February, but with the offer set to expire next week Pembina announced a rival all-share takeover offer on Tuesday that has the support of Inter Pipeline’s board of directors. Pembina’s bid was worth $19.45 a share.
Early Wednesday, Brookfield, which is Inter Pipeline’s largest shareholder, hiked its own takeover price and reaffirmed its commitment to pay a majority of the purchase price in cash. Brookfield’s new bid was worth $8.47-billion based on its closing price before the announcement, and it is willing to pay up to $5.6-billion in cash.
Pembina’s bid, meanwhile, would give Inter Pipeline shareholders 0.5 of a Pembina share for each share of Inter Pipeline they own. While the purchase price was originally $19.45 a share, it fluctuates with Pembina’s share price and currently amounts to $8.15-billion.
With Brookfield offering more cash than Pembina, Inter Pipeline shareholders will have to decide whether they want to cash out now or roll their stock over into a bigger pipeline company that pays a substantially higher dividend.
As part of its takeover bid Pembina raised its own monthly dividend by 1 cent a share to 22 cents, so if its takeover is approved Inter Pipeline’s shareholders would see their current monthly payout of 4 cents jump by 175 per cent – to 11 cents, for half a Pembina share – immediately upon closing.
Brookfield said Wednesday that it recently told Inter Pipeline’s board that it was willing to increase its bid to around $19.50 a share, but the board ultimately decided against that offer and backed Pembina’s instead.
Brookfield is now publicly questioning why the board backed the Pembina deal considering that its proposed synergies will likely lead to job losses. Pembina expects the takeover to deliver pretax synergies worth $150-million to $250-million annually, the majority of which are expected to come from lower general, administrative and operating costs.
In its recent discussion with Pembina’s board, “Brookfield Infrastructure reminded Inter Pipeline’s representatives that it was a financial investor and, unlike a strategic investor, would not be seeking to generate significant cost synergies by eliminating duplicative jobs,” Brookfield said in a statement.
Inter Pipeline declined to comment for this story, but its shares jumped 7.2 per cent Wednesday to close at $20.27, above both takeover bids.
Before Brookfield’s offer in February, Inter Pipeline’s stock price had declined sharply owing to weak oil and gas prices, and continuing cost overruns and delays at the Heartland petrochemical plant near Edmonton. The company has been building the facility for more than three years, and had been unsuccessful in finding a partner on the project.
The Heartland facility will convert Alberta propane into polypropylene plastic pellets for manufacturers. In May, 2020, Inter Pipeline disclosed that its construction cost had jumped by half-a-billion dollars to $4-billion. The ready date was also pushed out, and Heartland is now expected to be fully operational in 2022.
In April, Inter Pipeline was able to secure a substantial government grant under the newly created Alberta Petrochemicals Incentive Program that will provide $408-million in cash over three years once its Heartland complex is up and running in 2022. The new grant replaces the $200-million of royalty credits Inter Pipeline was set to receive under a different government program and the larger grant was seen by analysts as changing the takeover calculus.
Because the plant is getting government money, Brookfield’s argument about the potential for job cuts may carry more weight. Asked about the potential, Dale Nally, Alberta’s associate minister of natural gas and electricity, said in an e-mail that the complex will remain eligible for the grant regardless of who owns it, adding that at this stage the government has not been made aware of any specific job losses associated with the proposed merger.
Inter Pipeline’s board initially dismissed Brookfield’s hostile bid outright, arguing the company was worth significantly more money, but changed its tune shortly afterward and launched a strategic review. At the time, many analysts assumed few other companies would be interested in taking over Inter Pipeline.
Pembina’s all-share takeover bid is predicated on keeping its balance sheet in solid shape. Although Inter Pipeline has roughly $5-billion worth of debt on its books, rating agency DBRS Morningstar noted Tuesday that Pembina’s post-acquisition credit metrics will “weaken modestly” but added that it “does not expect the acquisition to have a material impact on Pembina’s financial profile.”
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Tim Kiladze
Kelly Cryderman