• Company looking for financial partners to buy stake this year
  • Stake sale to be used to finance Columbia Pipeline purchase

TransCanada Corp. may raise $2 billion this year by selling as much as 49 percent of its five natural gas pipelines in Mexico.

Canada’s second-biggest pipeline operator is “refinancing" its Mexican business to raise funds after agreeing to buy Columbia Pipeline Group Inc. on March 17 for $10.2 billion, Robert Jones, TransCanada’s Mexico country chief, said in a phone interview from Calgary. The sale of the stake can generate $2 billion in proceeds, while the entire Mexico pipeline business could be worth $5.8 billion, Faisel Khan, a Citigroup Global Markets Inc. analyst, wrote in a research note on Wednesday.

"What we’re going to do is sell up to 49 percent to a passive investor or financial investor," Jones said. "It will have no impact on our ability to finish the projects we are constructing” in Mexico.

Mexico plans to expand its pipeline infrastructure by 75 percent by 2018, the largest undertaking in the country’s history. The expansion plans follow the country’s decision to end state-run monopolies held by the Comision Federal de Electricidad and oil producer Petroleos Mexicanos, in an effort to generate billions in private investment. 

Financial Partners

TransCanada has not yet selected an adviser to assist with the stake sale and anticipates the interested buyers will be strictly financial partners, such as private equity funds, Jones said. The company has already received inquiries from several potential buyers, he said.

"There would likely be a lot of private equity and pension fund style money that would be very interested in an equity investment on a non-op basis with an experienced, proven operator like TransCanada," Jennifer Stevenson, Calgary-based vice-president and portfolio manager at 1832 Asset Management LP’s Dynamic Funds, said in an e-mail. She manages holdings in TransCanada.

Together with an estimated $4 billion of proceeds from the sale of TransCanada’s U.S. power generation assets, also being divested to help fund the Columbia Pipeline takeover, the deals could amount to as much as $6 billion in proceeds, according to Khan’s note. TransCanada will continue to participate in upcoming auctions as planned to win rights to develop and operate Mexico pipelines, Jones said.

More Pipelines

TransCanada issued the lowest bid this week to build and operate a natural gas pipeline between Tula and Villa de Reyes in central Mexico. It lost out on another line, awarded Tuesday to Fermaca.

The stake sale “has zero impact on our business development efforts,” Jones said. “We are looking forward to growing even more. Operations remain the same as well as the construction of existing projects.”

Private-equity investors and pension funds would be drawn to TransCanada’s Mexico business because it provides stable cash flow generation, backed by long-term contracts with limited or no commodity exposure, said Rebecca Hazan, a Toronto-based associate portfolio manager at Leon Frazer & Associates Inc., which holds TransCanada shares.

“They often look for these type of lower-risk, lower-reward type of investments,” Hazan said Wednesday in an e-mail. “Pension plans often don’t have the risk appetite to take on projects that have development or construction risk, so an operating pipeline in a country with slightly higher returns can be very attractive to these investors.”

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