It looks as though Enbridge Inc. is getting into the acquisition game again.
After staying on the sidelines of the big deal plays since 1994, the year it recruited Consumers' Gas Co. Ltd., Enbridge unveiled a $350-million (U.S.) friendly offer for Midcoast Energy Resources Inc. two weeks ago.
Enbridge investors seemed happy to hear it. Shares in the company jumped $1.50 (Canadian) to $41.50 on the Toronto Stock Exchange the day the deal was announced and have held onto most of their gains. The stock closed yesterday at $41.
The prevailing sentiment was that Enbridge, which has displayed a strong record of double-digit earnings growth from expansion of its existing operations in past years, needed something new to sink its teeth into.
Midcoast appeared to be just the thing. The Houston-based pipeline company has interests in the U.S. Gulf Coast region, an area that Enbridge has been eyeing for some time because of its mushrooming demand for gas-fired electrical generation. Enbridge is banking on that demand creating a need for expanded gas transportation systems.
Midcoast also boasts an impressive growth record through acquisitions -- 70 within five years -- and at the same time espouses a conservative, low-risk profile similar to Enbridge's through the use of long-term contracts.
Enbridge said most of Midcoast's assets eventually will be rolled into the Lakehead Pipe Line Partners LP, a master limited partnership with a capital tax advantage in the United States in which Enbridge holds a 15-per-cent stake. From there, Midcoast's management team, most of whom are expected to stay on, are charged with expanding the company's operations in the area by continuing the acquisition strategy.
"What the deal really does is give them a fourth leg for growth," said Randy Ollenberger, a Merrill Lynch analyst in Calgary. He divided Enbridge's existing businesses into three segments -- Canada's largest crude oil pipeline system, the Enbridge Consumers Gas distribution network in Ontario, and interests in the Alliance and Vector gas pipeline systems.
In a conference call, Pat Daniel, who took over the chief executive officer position from retiring CEO Brian MacNeill on Jan. 1, suggested the company would boost its growth rate.
Analysts agreed that the stock boasted a little more upside with the Midcoast deal, and many moved their 12-month target a tick or two higher. Winnie Siu, an analyst with Salman Partners in Vancouver, moved her $42.50 target to $43.50. Nick Majendie, a senior analyst with Canaccord Capital Corp. in Vancouver, said he would raise his $46 target to roughly $48.
"Enbridge is a funny stock. It goes in bursts. It gets expensive, and then it pulls back," Mr. Majendie said, adding he likes Enbridge at current prices. It is off its 52-week high of $44 reached in late December.
Merrill Lynch's Mr. Ollenberger, who said valuations in Enbridge and its peer group of pipeline companies are currently "pretty rich," conceded that Enbridge stock does have room to move higher. He has a target price of $44 on the company.
"They have definitely been the leader in the group, in terms of management track record and growth track record," he said.
Ms. Siu pointed out that although Enbridge will eventually unload most of the Midcoast assets into the Lakehead partnership, it is still constrained from future large acquisitions by its considerable debt burden.
Standard & Poor's Corp. rating service, which reiterated the company's single-A corporate credit rating in January, has a "negative" outlook on the company because of its higher-than-average debt-to-capital ratio of about 70 per cent.
(The rating service called the Midcoast deal, which included the assumption of $250-million [U.S.]in debt, a good strategic fit. It left the rating unchanged.)
Analysts said despite constraints on growth through acquisitions, there is still room to grow internally.
And as a yield investment, the company has been historically strong. Enbridge's common share dividend has grown steadily with earnings, from $1.015 in 1995 to $1.27 last year. The company has declared a $0.35 dividend for the first quarter, which would work out to $1.40 on an annual basis.
Bottom Line: Despite a slight acceleration in acquisitions, expect more of the same from Enbridge, which had a solid track record of double-digit growth under former CEO Mr. MacNeill.
Enbridge: vital statistics
Business description Provides energy transportation, distribution and related services. Head office: Calgary Telephone: 403-231-3900 Web site: http://www.enbridge.com TSE symbol: ENB Employees: 5,500 Share values Trailing 12-month earnings per share...$2.54
Trailing 12-month P/E ratio 16.14 Annual dividend $1.40 Dividend yield 3.42% 52-week intraday high $44 52-week intraday $26.80 Last close $41 Change from previous +25¢ 1-year total return 59.68% 60-month average annual return 24.83%
Funds with heaviest weighting in Enbridge Share holding as a % of total fund value, as of Feb. 28, *as of Dec. 29
GGOF Guardian Cdn. Lg Cap Classic* 3.8 Investors Dividend 5.1 Royal Dividend* 4.9 PH & N Dividend Income* 8.1 BMO Dividend 3.6 Scotia Canadian Dividend* 3.2 TD Dividend Growth 3.7
Source: Bloomberg Financial Services; Thomson Financial Datastream; http://www.globeinvestor.com
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