Antoine Gara , FORBES STAFF
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Enbridge Inc. is angling to be the must own pipeline stock in North America, supplanting struggling industry bellwether Kinder Morgan KMI +2.19%.
That’s the takeaway from Enbridge’s $28 billion all-stock acquisition of Spectra Energy SE +13.42%, a deal the Calgary-based company says will create the largest energy infrastructure firm in North America with a combined enterprise value of $127 billion, surpassing competitors Kinder Morgan, Energy Transfer and Enterprise Products Partners.
Pipelines run toward oil storage tanks stand at the Enbridge Inc. Cushing storage terminal in Cushing, Oklahoma, U.S. Daniel Acker/Bloomberg
Tuesday’s deal diversifies Enbridge’s oil-heavy transport and midstream operations into natural gas, it creates a USA-to-Canada operation that achieves the objectives of the Keystone XL Pipeline, and puts the combined company on track for double digit dividend growth rates in the coming years.
At a time when Energy Transfer had to rely on legal loopholes to renege from a $33 billion deal for Williams and Kinder Morgan has slashed its dividend to digest a $44 billion master limited partnership consolidation two years ago, it is Enbridge’s deal for Spectra that may deliver on the promise of pipeline consolidation.
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With Spectra in its coffers, Enbridge will generate 47% of its earnings before interest, taxes, depreciation and amortization from gas infrastructure and 49% from liquids, a more balanced operation. Both Enbridge and Spectra independently operate strong distribution businesses, and they also hold leading midstream toeholds in markets such as Cushing, Oklahoma. The upside of the merger is most likely to come from both companies’ large development backlogs and their ability to make new acquisitions after a phase of de-levering.
Between now and 2019, Enbridge and Spectra have a combined $26 billion in development spending, and post 2020 that figure moves to $48 billion as the combined company seeks to expand in the northeast and southeast, remove bottlenecks from liquids pipelines, and invest in new renewable projects like offshore wind. As Enbridge and Spectra continue to invest in growth, they also expect dividends to grow at an accelerated rate.
Enbridge on Tuesday reaffirmed its expectation of 12%-to-14% growth in cash funds from operations guidance through 2019, but said a Spectra deal will yield 10%-to-12% dividend growth through 2024. Were Enbridge to fulfill the promises embedded in Tuesday’s deal it would transform into one of the fastest growing and beter yielding pipeline stocks after a rough 24-month stretch for the sector.
“The addition of Spectra would transform Enbridge, and dramatically diversify its cash flow streams and asset base,” Gerald Hannochko, an anslyst with S&P Global Ratings said when reaffirming Enbridge’s credit ratings.
Spectra Energy shareholders will receive 0.984 shares of the combined company for each share of Spectra Energy common stock they own, thus valuing Spectra shares at $40.33 as of Friday’s close. Enbridge shareholders will own 57% of the combined company, while Spectra holders will own 43%. On a pro forma basis, the combined company generated $31 billion in sales and $4.4 billion in EBIT during the 12-months ended on June 30.
The new company, called Enbridge, “will have the scale, balance sheet strength, financial flexibility and free cash flow to comfortably fund future growth,” the company said in a press release.
Al Monaco, Enbridge’s current CEO, will lead the combined company while Spectra CEO Greg Ebel will be chairman. Eight Enbridge directors will be designated to the new company’s board, while Spectra will have five nominees.
“With combined secured projects in execution of $20 billion) and another $37 billion of projects under development, the Transaction allows us to extend our anticipated 10-12 percent annual dividend growth through 2024. We believe our combination of best-in-class assets, superior growth and strong commercial underpinning of our business will be unrivaled in our sector,” Enbridge CEO Monaco said in a press release.
“The transaction premium recognizes the strength of Spectra Energy’s world-class natural gas pipeline system and significant expansion program, while providing shareholders the opportunity to participate in the unparalleled value creation potential of the combined company,” added Spectra CEO Ebel.
Enbridge shares rose nearly 4% in Tuesday trading, while Spectra Energy shares surged over 13%.