Inter Pipeline Ltd. ’s board of directors is recommending a sale of the Calgary-based company to Pembina Pipeline Corp. for $8.3-billion in shares, putting pressure on Brookfield Infrastructure Partners LP to substantially increase its hostile takeover bid.
Toronto-based Brookfield, which is Inter Pipeline’s largest shareholder, went public with a $7.1-billion hostile bid in February. At the time, Brookfield was willing to pay up to $4.9-billion of the purchase price in cash, but Inter Pipeline’s board dismissed the bid outright, arguing the company was worth significantly more money.
The board changed its tune shortly afterward and launched a strategic review that included continuing to search for a commercial partner for its $4-billion Heartland petrochemical complex northeast of Edmonton, as well as an outright sale of the company. When the review commenced, many analysts assumed few other companies would be interested in taking over Inter Pipeline, so Brookfield was widely seen as the front-runner – though it would likely need to increase its offer.
With Brookfield’s bid set to expire in one week, Calgary-based Pembina emerged as a white knight Tuesday. Its takeover bid would give Inter Pipeline shareholders 0.5 of a Pembina share for each share of Inter Pipeline they own, and based on Pembina’s closing share price Monday, the purchase price amounts to $19.45 a share, surpassing Brookfield’s bid, worth $16.50 a share.
Combined, Pembina shareholders would own 72 per cent of the merged company, and Inter Pipeline’s shareholders would hold the remaining 28 per cent. The merged company will be run by Pembina’s executive team.
Pembina’s shares fell 2.8 per cent on Tuesday to $37.81, lowering the value per share that Inter Pipeline shareholders will receive in the all-stock deal.
In a note to clients, RBC Dominion Securities analyst Robert Kwan wrote that Pembina’s bid was likely a surprise to many because of the company’s “focus over the past year with respect to a conservative posturing during the COVID-related downturn.” In March, 2020, Pembina mothballed a number of capital projects, including pipeline expansions.
Combined with Inter Pipeline, Pembina’s pipeline capacity will double to 6.2 million barrels per day and its processing capacity will jump roughly 40 per cent to 8.8 billion cubic feet a day.
Brookfield has yet to weigh in on its next move, which could include raising its bid. The company controlled 9.75 per cent of Inter Pipeline’s shares when it first bid in February, and also had economic exposure to an additional 10 per cent of Inter Pipeline’s stock through securities known as total return swaps. Brookfield declined to comment for this story.
Pembina and Inter Pipeline operate similar businesses in different parts of Western Canada, so Pembina is marketing the takeover as a play for geographic diversification. “Scale, financial strength and diversity will enable the combined companies to do projects neither could do on their own,” Pembina wrote in an investor presentation.
By offering shares, Pembina is looking to keep its balance sheet in solid shape, but Inter Pipeline also has roughly $5-billion worth of debt on its books. On a conference call Tuesday, Pembina chief executive Mick Dilger acknowledged a takeover would translate to higher debt in the near term, but “when you start looking out to 2023, 2024 … those leverage metrics improve pretty substantially,” he said.
Rating agency DBRS Morningstar noted Tuesday that Pembina’s postacquisition credit metrics will “weaken modestly” but added that it “does not expect the acquisition to have a material impact on Pembina’s financial profile.”
While Brookfield may come back with a higher cash bid, Pembina hopes to win over Inter Pipeline’s shareholders with a juicier dividend. As part of the takeover bid, Pembina raised its own monthly dividend by 1 cent a share to 22 cents. If the 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.
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 – which tend to mean job losses.
Before Brookfield’s bid 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 plant. The company has been building the petrochemical 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.
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