The takeover battle for Calgary-based Inter Pipeline Ltd. is growing more contentious, with Inter Pipeline and its friendly merger partner, Pembina Pipeline Corp., asking Alberta’s securities watchdog to intervene and block what they call “coercive tactics” by rival hostile bidder Brookfield Infrastructure Partners LP .
The request follows Brookfield’s original complaint to the Alberta Securities Commission, arguing that a termination fee Pembina and Inter Pipeline have agreed on if Pembina’s bid is unsuccessful is unfair. A hearing date has been set for July 7.
Brookfield is hoping to convince the ASC to rule against the termination fee that Inter Pipeline will have to pay Pembina if their friendly merger does not proceed. If the fee is not scrapped and Brookfield’s rival bid is supported by Inter Pipeline shareholders, Brookfield will effectively have to pay the termination fee.
To counter, Inter Pipeline has filed an argument with the ASC that Pembina is backing. The two companies are zeroing in on Brookfield’s use of securities known as total return swaps that give Brookfield a 9.9 per cent economic interest in Inter Pipeline – but do not provide Brookfield with voting control of that block of shares. These are in addition to Brookfield’s outright ownership of a 9.75-per-cent stake in Inter Pipeline’s common shares.
In Canada, securities laws require any shareholder with a stake of more than 10 per cent to publicly disclose the holding. The rule is designed to prevent creeping takeovers, in which a shareholder quietly amasses a large holding and can then effectively control the outcome of a takeover battle.
Because Brookfield owns just 9.75 per cent outright, it has remained below the early warning threshold that would require public disclosure. Yet Brookfield has been touting its 9.9-per-cent economic interest through the swaps, and Pembina and Inter Pipeline worry Brookfield may convince some shareholders that its hostile bid will be tough to stop because the perceived voting block is so large.
In a statement, Inter Pipeline argued, “Brookfield’s actions with regard to the total return swaps are detrimental to Inter Pipeline shareholders and the capital markets more generally.”
Pembina, meanwhile, was more biting. “Brookfield cannot use its ‘block’ of shares to threaten [Inter Pipeline’s] strategic merger with Pembina, while at the same time claiming that it does not control these shares and that they count toward acceptance of its tender offer.”
Pembina added Brookfield has not disclosed its counterparty for the total return swaps, which means the “nature and extent of any business or other relationships between Brookfield and the swap dealer” remain unknown. Pembina worries any relationship could influence how the swap dealer votes.
Pembina and Inter Pipeline are asking the ASC to force full disclosure of Brookfield’s total return swap partner, and they have also petitioned for the related shares to be considered beneficially owned or controlled by Brookfield. If they are, it would be mean they could not be included to meet a minimum tender threshold that requires 50 per cent of independent shareholders to support Brookfield’s bid.
The filing by the two companies with the ASC follows Brookfield’s decision last week to revise its bid and allow Inter Pipeline shareholders to opt for an all-cash buyout. Originally, Brookfield had capped how much cash it was willing to pay – which meant the rest would be paid in Brookfield shares.
Pembina’s bid is supported by Inter Pipeline’s board of directors, and on Monday the board reaffirmed its commitment despite Brookfield’s recent all-cash revision.
Brookfield put Inter Pipeline into play with a hostile takeover offer in February after Inter Pipeline’s stock declined sharply because of weak oil and gas prices and continuing cost overruns and delays at its Heartland Petrochemical Complex, near Edmonton. The company has been building the facility for more than three years and struggled to find a partner on the project until Pembina came along in June. The facility will convert Alberta propane into polypropylene pellets for manufacturers.
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