TransCanada Locks in Growth With $10.2 Billion Pipeline Deal

  • Acquisition expands TransCanada's U.S. natural gas reach
  • Deal supports and may boost TransCanada dividend growth

TransCanada Corp. is undertaking its biggest-ever deal with the purchase of Columbia Pipeline Group Inc. for $10.2 billion, expanding its reach in the U.S. natural gas market.

TransCanada will pay $25.50 a share to Columbia holders, representing a 11 percent premium to Columbia’s closing price on March 16, and will also assume about $2.8 billion of debt, it said in a statement on Thursday. The Calgary-based company will fund the purchase with proceeds from asset sales and a C$4.2 billion ($3.2 billion) offering of new shares.

The deal helps TransCanada grow its largest business, gas pipelines, as it faces challenges building new oil conduits. The acquisition includes more than 15,000 miles (24,000 kilometers) of gas pipelines as well as underground storage and processing facilities owned and operated by Columbia. TransCanada may augment its annual dividend growth rate of eight to 10 percent a year with the purchase, the company said.

“It’s very complementary to what they already have,” Skip Aylesworth, who manages about $1.5 billion in Boston including the Hennessy Gas Utility Fund, said Thursday by phone. Hennessy holds shares of both TransCanada and Columbia. “They have an east-west superhighway in Canada. This gives them a north-south superhighway.”

Units of Columbia Pipeline Partners LP, the master limited partnership controlled by Columbia Pipeline Group, which owns a 46.5 percent stake, fell a record 23 percent and were down 18 percent to $13.15 as of 10:45 a.m. in New York. 

Slower Growth

Barclay’s Plc analyst Christine Cho forecast slower growth in the partnership’s investor payout under TransCanada’s control and cut her target price for the units 21 percent to $15. “News was slight on strategy for the MLP,” she wrote in research published Friday.

Columbia Pipeline Group shares were up 5.9 percent to $24.90, while TransCanada slipped 1.7 percent in Toronto to C$48.60. TransCanada’s U.S. MLP, TC Pipelines LP, fell 2.4 percent to $52.

TransCanada already gets the bulk of its revenue, 48 percent in 2015, from gas shipping. Including its Mainline pipeline system that crosses Canada, the company owns 35,200 miles of gas lines and has stakes 6,700 more miles, supplying about 20 percent of North America’s gas, according to its website.

TransCanada has been seeking to grow its presence in the U.S. gas market as production rises from Appalachia fields. Vast supplies of cheap gas from the Marcellus and Utica shale plays are pushing western Canadian volumes out of their traditional markets, as U.S. producers seek new buyers north of the border.

‘Rare Opportunity’

“The acquisition represents a rare opportunity to invest in an extensive, competitively-positioned, growing network of regulated natural gas pipeline and storage assets in the Marcellus and Utica shale gas regions,” said Russ Girling, TransCanada’s president and chief executive officer, in the statement.

The company has had its eye specifically on getting a pipeline into the Marcellus, which stretches across Pennsylvania and parts of New York, Ohio and West Virginia. Girling said last November that the company may consider an acquisition to grow its Marcellus business, and that it’s cheaper for existing players to build capacity.

The acquisition adds to TransCanada’s U.S. deals in the power and utility space, including the $657 million purchase completed last month of a Pennsylvania power plant from Talen Energy Corp. The offer price represents a 29 percent premium to Columbia’s shares on March 9, the day before reports that the companies were in discussions about a deal.

Asset Sales

TransCanada said its planned sale of power assets in the U.S. Northeast, along with its sale of a minority interest in its Mexican gas pipeline business, will add to proceeds from the equity offering to pay for its purchase of Columbia. The offering of 92 million subscription receipts at C$45.75 apiece represents a 5 percent discount to the company’s closing share price of C$48.15 on Wednesday. Royal Bank of Canada and Toronto-Dominion Bank are the underwriters.

The takeover also comes amid heightened merger and acquisition activity in the U.S. pipeline space in recent years. The $58 billion purchase by Energy Transfer Equity LP of Williams Cos., announced last September, is the largest in the last decade and part of $127 billion of U.S. pipeline deals announced in 2015, according to data compiled by Bloomberg. Deals worth at least $2.3 billion in the sector have been announced in 2016.

Growth Concerns

TransCanada’s purchase of Columbia may ease investor concerns over its ability to grow over the long term. TransCanada has lately been focusing on small- to medium-sized projects to support its annual dividend growth as it struggles to win political support for big oil pipelines including Keystone XL and Energy East.

TransCanada’s exclusive financial adviser was Wells Fargo & Co., while Columbia’s advisers were Goldman Sachs & Co., and Lazard Ltd. TransCanada’s legal advisers were Mayer Brown LLP, Blake, Cassels & Graydon LLP and Osler, Hoskin & Harcourt LLP. Columbia’s legal counsel was Sullivan & Cromwell LLP.

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