Inter Pipeline Ltd. has secured a substantial government grant for its $4-billion petrochemical plant, making the project more appealing to a potential partner and putting pressure on Brookfield Infrastructure Partners LP to raise its hostile takeover bid for the company.
Under the newly created Alberta Petrochemicals Incentive Program, Inter Pipeline will receive $408-million in cash over three years once its Heartland petrochemical complex is up and running in 2022. The new grant replaces and raises the $200-million of royalty credits Inter Pipeline was set to receive under a different government program.
The Heartland complex just outside Edmonton lies at the heart of Brookfield’s bid for Inter Pipeline. The plant is overbudget and has faced construction delays, creating uncertainty that has weighed on Inter Pipeline’s share price. Management has been looking for a partner for the plant to split some development costs but so far has been unsuccessful in its search.
The new cash grant is likely to change Brookfield’s takeover calculus. “We view this as a significant positive for Inter Pipeline as there were previously concerns about the recovery of the credits under the prior grant,” Stifel FirstEnergy analyst Ian Gillies wrote in a note to clients, adding that the updated cash grant translates to 95 cents per Inter Pipeline share. “We expect Brookfield may need to revisit its cash bid of $16.50 to $18.25 per share,” he wrote.
The grant could also make the project more appealing to a partner by partially offsetting remaining development costs. However, analysts have argued that Brookfield is in the driver’s seat because it holds securities that amount to a 19.65-per-cent stake in Inter Pipeline. They have also argued that its bid range was fairly valued (before the recent grant).
Yet Brookfield only has voting control over half of its position. The rest gives the company economic exposure to Inter Pipeline through securities known as total return swaps, but it is different from direct ownership. Brookfield declined to comment for this story.
Should the grant result in a higher bid from Brookfield, it may appear that shareholders are benefiting at taxpayers’ expense. Asked about the timing, the Alberta government said Inter Pipeline’s initial application was made last November and added that the program application focuses on the project itself and does not take ownership into consideration.
“All projects that meet the eligibility criteria will be eligible for funding under [the Alberta Petrochemicals Incentive Program], regardless of any specific ownership or shareholder situations,” Dale Nally, Alberta’s associate minister of natural gas, wrote in a statement to The Globe and Mail.
Brookfield originally approached Inter Pipeline’s board about a full takeover last fall but was ultimately rebuffed. Frustrated, Brookfield went public with its intentions in February.
Brookfield’s formal takeover bid is worth $16.50 a share. At this price, the 80-per-cent position it does not currently own is worth $5.7-billion, and Brookfield is willing to pay a maximum cash consideration of approximately $4.9-billion, with the remainder in shares. The offer values all of Inter Pipeline, including Brookfield’s stake, at $7.1-billion.
Inter Pipeline’s board originally said very little after the bid was made public, but the directors have since adopted a new approach and launched a strategic review of the company.
The Heartland facility will convert propane into polypropylene plastic pellets used for scores of products, including children’s toys. Last May, 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.
Projects like Heartland fit squarely into Alberta’s new grant program, which is designed to encourage building petrochemical facilities in the province. Alberta has ample supply of natural gas, and propane is a by-product of natural gas production. However, natural gas prices have suffered from growing North American supply over the past decade as technological progress made it much easier for producers to tap vast quantities of shale gas in the United States.
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