TransCanada Corp. is buying Houston-based Columbia Pipeline Group Inc. for $10.2-billion (U.S.) in cash to give it a major position in a massive shale gas region in the U.S. Northeast, where it has faced a competitive threat.
TransCanada will fund part of the transaction, the largest in Canada this year, with a $4.2-billion (Canadian) sale of subscription receipts, to be exchanged for stock when the deal closes. Word of the talks between the two companies had leaked out last week.
It is offering $25.50 (U.S.) per Columbia share, representing a 32-per-cent premium to the average price of the U.S. firm's stock over the past 30 days.
"Columbia's assets and growth plan fit very well with our overall strategy of owning and operating highly contracted and or regulated assets that generate stable and predictable earnings and cash flow streams," TransCanada chief executive officer Russ Girling said on a conference call.
The acquisition, which also includes the assumption of $2.8-billion of Columbia's debt, will make TransCanada one of the continent's largest regulated natural-gas-pipeline companies, TransCanada said.
It will also help solve a thorny problem for TransCanada's decades-old west-to-east gas transport franchise.
It has been threatened by rapid growth in the Marcellus shale formation over the past decade, which undercut the company's share of the lucrative U.S. Northeast market. The region now produces more than 15 billion cubic feet a day, more than all of the natural gas produced in Western Canada.
Meanwhile, TransCanada's traditional gas transport business has been overshadowed by controversy as it has struggled to advance multibillion-dollar oil pipeline projects such as Keystone XL, which Washington rejected last year.
The target firm operates 18,000 kilometres of pipelines and 286 billion cubic feet of gas-storage capacity in the Marcellus and Utica production areas, and its Columbia Gulf Transmission unit runs a 5,400-kilometre pipeline system that extends from Appalachia to the U.S. Gulf Coast.
Mr. Girling said adding Columbia's operations will create a 91,000-km natural-gas-pipeline system connecting the most prolific supply basins to markets across the continent. It will also be positioned to feed liquefied natural gas terminals for export.
The combined company will have $23-billion (Canadian) of near-term projects secured by long-term contracts or regulated cost-of-service revenue that will support, or even increase, TransCanada's target of 8-per-cent to 10-per-cent dividend growth a year through 2020, he said.
TransCanada has hired financial advisers to sell some of its power-generation assets in the U.S. Northeast. It is also looking to sell a minority stake in its Mexican natural-gas-transmission business, chief financial officer Don Marchand said.
TransCanada is selling the subscription receipts in a bought deal led by the investment arms of Royal Bank of Canada and Toronto-Dominion Bank for $45.75 each, which is 7.4 per cent below the company's closing stock price on the Toronto Stock Exchange.
The massive offering extends a string of billion-dollar bought deals by Canadian dealers. Last year, Canada had 11 of them, which was abnormally high. This year, there have already been four more – for Enbridge Inc., Algonquin Power & Utilities Corp., Franco-Nevada Corp. and now TransCanada.
With files from reporters Jeff Lewis in Calgary and Tim Kiladze in Toronto