Will Enbridge, Spectra Deal Succeed Where Williams, ETE Failed?

In a deal that would create the largest energy pipeline and infrastructure company in North America, Enbridge Inc. (NYSE: ENB) and Spectra Energy Inc. (NYSE: SE) have agreed to a stock-for-stock merger that will create a company with a pro-forma enterprise value of approximately $127 billion. Enbridge shareholders will own 57% of the combined firm that will be called Enbridge.

According to Tuesday’s announcement, Spectra shareholders will receive 0.984 share of Enbridge stock for each share of Spectra stock they own, valued at $40.33 per share, a premium of 11.5% to Friday’s closing price of Spectra’s stock. Enbridge noted that the transaction “allows us to extend our anticipated 10-12 percent annual dividend growth through 2024.” Enbridge paid a dividend yield of 3.94% as of Friday’s closing bell.

A deal like this was, perhaps, inevitable. After TransCanada Corp. (NYSE: TRP) was denied permission to cross the U.S.-Canadian border with its proposed Keystone XL pipeline, the company did not mourn (although it is suing), but went out and acquired Columbia Pipeline Group for $10 billion in a deal that closed in June. TransCanada paid a premium of 8.5% for Columbia.

Another similarity to the TransCanada deal is that Spectra is primarily a natural gas infrastructure company, just as Columbia was. That diversifies Enbridge, which also like TransCanada, is getting some pushback on an oil pipeline from the oil sands in Alberta to Canada’s east coast. Enbridge operates a reversed 300,000 barrel-per-day pipeline (called Line 9) that transports crude from Sarnia, Ontario, to Montreal. A lawsuit brought by the Chippewas of the Thames First Nation claims the first nation was not consulted properly over the pipeline that runs through its territory.

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Natural gas pipelines are not nearly as controversial as crude oil pipelines, especially when the pipelines are already in the ground and transporting gas. Enbridge CEO Al Monaco spoke about diversifying the company’s asset base:

Over the last two years, we’ve been focused on identifying opportunities that would extend and diversify our asset base and sources of growth beyond 2019. We are accomplishing that goal by combining with the premier natural gas infrastructure company to create a true North American and global energy infrastructure leader. This Transaction is transformational for both companies and results in unmatched scale, diversity and financial flexibility with multiple platforms for organic growth.

Now all that the Enbridge and Spectra boards need to do is convince shareholders and regulators that the deal is in everyone’s best interests. That was not what torpedoed the much ballyhooed — and ultimately failed — merger of Williams Companies Inc. (NYSE: WMB) and Energy Transfer Equity L.P. (NYSE: ETE). That deal fell apart when the tax-free status of the deal was questioned. This stock-for-stock deal should not raise that issue.

The transaction is expected close in the first quarter of 2017 following shareholder and regulatory approvals in both Canada and the United States. The stock-for-stock transaction is not expected to affect Enbridge’s available cash flow from operations through 2019, and is “strongly additive to its growth” after that date. Enbridge said it expects to divest about $2 billion in noncore assets over the next 12 months “to provide additional financial flexibility.”

Spectra shares traded up more than 9% in Tuesday’s premarket session to $39.50, above the 52-week range of $21.43 to $37.14. The stock’s consensus 12-month price target is $36.93.

Enbridge shares traded down about 1.8%, at $40.25 in a 52-week range of $27.43 to $44.17. The 12-month price target on the stock is $44.16.

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