TransCanada Corp. may seek to keep activist investors at bay by accelerating plans to sell U.S. assets into its master limited partnership or boost its dividend. Analysts doubt that a breakup of the pipeline and power company is in the cards, however.
Last week, shares in TransCanada surged on speculation that activists were amassing a position and sounding out investors on the prospects for drastic moves to boost value, including splitting off the company's power generation business.
Paul Lechem, analyst at CIBC, laid out three potential actions the company could take to increase the share price: a break-up along the pipeline and power lines, speeding up "drop-downs" of U.S. pipeline assets into TC Pipelines LP as well as launching a "yieldco" for similar moves in Canada, and increasing the dividend.
The split-up would transform TransCanada into two pure-play companies, betting that the pipeline business would attract higher multiples than the combined operations.
The scenario has problems, though, Mr. Lechem said. For one thing, both entities would require new administration, which adds costs. Meanwhile, the power business requires large amounts of capital in the coming years, including for the refurbishment of remaining units at the Bruce nuclear facility in Ontario.
Meanwhile, TransCanada's major pipeline projects, including Keystone XL, Energy East and two British Columbia LNG lines, still carry a fair amount of risk, as none has received regulatory approval. That could reduce multiples until there is more certainty with the billions of dollars worth of projects, he said.
"These issues suggest that a split of the business is neither significantly accretive, nor strategically logical," he wrote in a report.
TransCanada said last week that it is committed to transferring the rest of its U.S. gas pipeline assets to TC Pipelines. Mr. Lechem said the company has resisted moving faster because it could impair its ability to raise money in the future, when it begins to construct its major projects. A possibility is a modest increase in the dividend to bring the company's yield closer to the average in the sector, he said.
Regardless of the potential for activist investors to shake things up, investors should keep their eyes on the long-term fundamentals, which are positive but may not bring speedy stock gains, said Linda Ezergailis, analyst at TD Securities Inc. Ms. Ezergailis has a hold rating on the stock, but increased her 12-month target to $61 from $56.
"We believe that management could make some investor-friendly tweaks to how it executes its espoused strategy, but we are skeptical that it can be convinced to make transformational changes to the company, and therefore see the share price as fully valued," she wrote.