Enbridge Seeks to Create ‘FedEx’ of Pipelines in Spectra Deal

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  • Company will be largest North American energy line owner
  • Transaction is expected to close in the first quarter of 2017

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For pipeline companies, it may be easier to buy than build. 

Enbridge Inc. agreed to purchase fellow line owner Spectra Energy Corp. for $28 billion in stock. The largest-ever foreign purchase by a Canadian company, the combination will create the biggest energy pipeline and storage operator in North America.

“We’ll be the FedEx” of the pipeline business, Greg Ebel, Houston-based Spectra’s chief executive officer, said in an interview. “We ship, we pick up, we store product,” said Ebel, who will become non-executive chairman at Enbridge.

The takeover comes amid a wave of consolidation in the pipeline industry, after lower oil and natural gas prices have diminished demand for shipments and as building new projects becomes increasingly difficult because of local opposition. Protesters disrupted hearings on a proposed TransCanada Corp. pipeline in Montreal last week. Several arrests were made last week at a site in North Dakota where Energy Transfer Partners is trying to build a line to Illinois.

“The environmentalists are out there, they’re powerful, and they’re trying to stop the natural gas pipelines,” said Jay Hatfield, chief executive officer of Infrastructure Capital Management LLC, a New York-based hedge fund. “If you own one, that makes it that much more valuable.”

In March, TransCanada Corp. agreed to buy Columbia Pipeline Group Inc. for $10.2 billion. Energy Transfer Equity LP terminated an agreement to buy Williams Cos. amid a stubborn two-year energy rout, while Kinder Morgan Inc. has moved to simplify its structure.

“Activity begets activity and I think that’s what this may do,” said Libby Toudouze, partner and portfolio manager at Cushing Asset Management. “As companies look to their future, they’re thinking how can we be bigger, better, faster, stronger -- and the quickest way to do that is to buy somebody.”

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A 15 percent annualized dividend increase is expected in 2017, the companies said. Cost savings from the merger could reach C$540 million, they said. Spectra rose 13 percent to $40.72 at 11:26 a.m. in New York. Enbridge rose 4.2 percent to $42.70.

The combined company, called Enbridge Inc., will be based in Calgary. Al Monaco will stay on as president and chief executive officer. The newly-expanded Enbridge will have C$26 billion ($20 billion) of planned projects through 2019, including the Sabal Trail gas line and the Bakken Pipeline.

The companies plan to maintain "strong investment grade" credit ratings as projects that are currently under construction come into service, Monaco said on a conference call. The combined companies will have about $46 billion in debt, excluding that of their master-limited partnership units, said Michael Kay, an analyst at Bloomberg Intelligence.

Al Monaco

Photographer: F. Carter Smith/Bloomberg

“Now is the time to really be thinking of positioning for the future,” Monaco said. “For us, strategically it’s a check for us to move forward in the gas business.”

Spectra shareholders will get $40.33 per share in the all-stock agreement, representing a premium of 12 percent to the Sept. 2 closing price, according to a company statement Tuesday. The deal, which has a break-up fee of $1.36 billion, will close in the first quarter of 2017, pending regulatory approval.

The combined entity will be a "world-class" North American energy infrastructure company, with Enbridge picking up key pipelines in the U.S. Northeast, Rob Thummel, managing director and portfolio manager at Tortoise Capital Advisors LLC, said in an e-mail Tuesday. The deal “adds diversity” to both companies and “extends the runway of double-digit dividend growth for ENB shareholders through 2024," Thummel said.

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Spectra’s investors will receive 0.984 shares of the combined company for each share of Spectra common stock they own. Shareholders of the Canadian acquirer will own about 57 percent of the combined company. Over the next 12 months, Enbridge said it expects to divest about $2 billion of non-core assets.

Credit Suisse Securities and RBC Capital Markets acted as financial advisers to Enbridge while Sullivan & Cromwell LLP and McCarthy Tetrault LP provided legal advice.

BMO Capital Markets and Citi acted as financial advisers for Spectra while Wachtell, Lipton Rosen & Katz and Goodmans LLP provided legal advice.