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Pipes sit stacked at the TransCanada Corp. Houston Lateral Project pipe yard in Mont Belvieu, Texas, U.S., on Wednesday, March 5, 2014. The pace of oil sands production is key in the debate over Keystone, a Canada-to-U.S. line TransCanada Corp. proposed in September, 2008, when oil was more than $100 a barrel.

Scott Dalton/Bloomberg

After weeks of rumours, TransCanada Corp. is formally being pursued by an activist investor bent on shaking up the company.

In a letter to the board sent Monday, New York-based Sandell Asset Management said Calgary-based TransCanada is worth $75 a share, though it was trading at about $56 on Monday morning. The move comes after TransCanada shares have been boosted by the Republican domination of the U.S. midterm elections, which may have increased the odds that the company's Keystone XL pipeline will be approved.

The activist's path to profit includes separating TransCanada's pipeline business from its energy and power business through a spin off. But Sandell is more focused on convincing TransCanada to change the way it moves U.S. assets into its master limited partnership (MLP), called TC PipeLines LP. MLPs, concentrated in sectors such as commodities and natural resources, have attracted investors south of the border with robust cash distributions and tax advantages for companies.

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In early October, TransCanada moved to accelerate the shifting of assets into its MLP. One recent example of such "drop downs" occurred Nov. 12, when it offered to sell its stake in Gas Transmission Northwest LLC into TC Pipelines. At the time, chief executive Russ Girling said the company is committed to "drop down" its U.S. assets into the MLP "on a more sizable and frequent basis."

But that commitment isn't enough for Sandell, citing comparable U.S. companies that have moved all of their U.S. assets at once – known as an "all-in drop down." This increased scale could attract a new set of MLP-focused U.S. investors who will find more value in the assets.

Sandell's letter also follows weeks of speculation that TransCanada was being stalked by U.S. activists. Sandell has a $36-million (U.S.) stake in TransCanada. Another known activist investor, Mason Capital Management LLC, has a $206.8-million stake, according to U.S. filings. Mason has also reportedly met with shareholders of TransCanada, according to the Wall Street Journal. While Sandell is not working with Mason or any other shareholders, it has met privately with representatives from the firm as well as other institutional shareholders, according to a person familiar with the matter.

Analysts have expressed doubts that a breakup would be effective. But Sandell still thinks the company's use of its MLP as a "cash ATM" is inefficient, according to Thomas Sandell, the former Bear Stearns co-head of risk arbitrage who runs the activist firm. He expressed disappointment that the company hasn't followed its peers such as Spectra Energy Corp. in using the MLP structure more significantly.

The MLP model has its limits, however. This summer, one of the companies that helped put the MLP structure on the map for energy companies, Kinder Morgan Inc., said it would move away from the structure and become a corporation again. The U.S. Treasury department later said it was looking into the effects of MLPs on tax revenue.

Sandell's last big call for action in the pipeline and gas space came when it called for Houston-based Spectra to cut costs and become a holding company, spinning off Canadian and U.S. businesses. That split never happened.

Mr. Sandell said a spinoff of the power generation business at TransCanada would "not only highlight the hidden value of the consolidated pipeline segment, but also allow each individual company to attract world-class management."

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Since Spectra, Sandell called for change at two other companies – and neither of them have a natural-resources focus. It went after restaurant and packaged foods business Bob Evans Farms Inc. in September, 2013, a move that led to Sandell recently taking over one-third of the board of directors. It also called for transportation company FirstGroup PLC to split itself up and sell off its Greyhound bus business.

The letter to TransCanada comes ahead of the annual shareholder meeting on Wednesday, Nov. 19 in Toronto. TransCanada didn't immediately respond to requests for comment.

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