Enbridge to acquire all public equity of Spectra Energy Partners; companies hope for Q4 close
Their effort to combine has rumbled through the news for about the past two years. On Aug. 24, 2018, Enbridge Inc. (ticker: ENB) and Spectra Energy Partners, LP (ticker: SEP) announced that they had entered into a definitive agreement under which Enbridge will acquire all of the outstanding public common units of SEP on the basis of 1.111 common shares of Enbridge for each common unit of SEP.
The agreed exchange ratio represents a 9.8% increase to the exchange ratio offered by Enbridge on May 17, 2018 of 1.0123 Enbridge common shares per SEP common unit. The transaction is valued at US $3.3 billion / CAN $4.3 billion based on the closing price of Enbridge’s common shares on the New York Stock Exchange (NYSE) / Toronto Stock Exchange (TSX) on August 23, 2018.
Benefits and Considerations for SEP Unitholders
Significant weakening of the US Master Limited Partnership (MLP) capital markets has adversely affected the growth opportunities for MLPs, including SEP. MLPs are dependent on consistent access to the capital markets at a reasonable cost of capital to grow their distributions. If SEP were to continue as a stand-alone entity in such an environment, it would be required to transition to a self-funding model using internally generated cash flow. SEP’s priority would be to strengthen its balance sheet thereby limiting future distribution growth.
This transaction offers SEP public unitholders a superior investment proposition in Enbridge common shares, including:
- Direct ownership in the largest energy infrastructure company in North America comprised of premium liquids transportation, natural gas transmission and natural gas distribution utility franchises that generate diverse, safe and reliable cash flows
- A secured growth profile which underpins expected 10% annual dividend growth through 2020 with substantially enhanced dividend coverage
- A more effective cost of capital to finance growth
- A stronger balance sheet and superior credit profile
- Reduction in risks related to continued uncertainty and potential unfavorable changes applied to MLPs related to the revised Federal Energy Regulatory Commission (FERC) tax policies
- Increased opportunity for further meaningful capital appreciation as Enbridge advances its strategic priorities
- Enhanced trading liquidity
The transaction also provides SEP unitholders an attractive value reflecting, among other factors, the July 18, 2018 FERC Order on Rehearing, which clarified its revised policy on the treatment of income taxes for MLPs. The clarification could potentially improve SEP’s position relative to its cost of service assets given the magnitude of SEP’s historical deferred income tax balances, and is therefore uniquely positive for SEP among the Enbridge family of sponsored vehicles.
The transaction premium is attractive particularly in light of SEP’s limited future capacity for distribution growth. Also, for SEP unitholders, the value received removes uncertainty overhang created by the FERC policy announcements.
Benefits and Considerations for Enbridge Shareholders
The buy-in of SEP is strategically and economically attractive to current and future Enbridge shareholders and provides substantial benefits, including:
- Significant advancement of Enbridge’s strategy to simplify and streamline its corporate structure which further increases the transparency of its strong cash generating assets
- An expected neutral impact on Enbridge’s three-year financial guidance through 2020 and positive benefits to Enbridge’s post-2020 outlook primarily due to tax and other financial synergies
- Increasing ownership in its core businesses and further enhancing its industry-leading, low-risk profile
- An improved Enbridge credit profile due to the elimination of SEP public distributions, higher retention of cash to support self-funded growth and opportunities to minimize the structural subordination of Enbridge debt
- Reduction in risks related to uncertainty and potential unfavorable changes associated with regulatory tax policies applied to MLPs and potential incremental Enbridge support required by SEP in difficult capital markets
- No change to consolidated EBITDA following completion of the merger since the assets held by SEP are already managed and operated by Enbridge’s U.S. subsidiaries and consolidated for accounting purposes by Enbridge
Other Information
As a result of the merger, Enbridge would acquire all of the 81.9 million public outstanding common units of SEP at a fixed exchange ratio of 1.111 common shares of Enbridge for each common unit of SEP. In aggregate, based on the Agreed Exchange Ratio, Enbridge would issue an estimated 91.0 million Enbridge common shares in connection with the transaction, representing approximately 5 percent of the total number of Enbridge common shares outstanding.
A more detailed description of the Agreement will be set forth in Enbridge’s Current Report on Form 8-K that it expects to file with the Securities and Exchange Commission (the SEC) on August 24, 2018.
The transaction has been approved by the board of directors of Enbridge and certain of its wholly owned US subsidiaries. The board of directors of the general partner of SEP (SEP Board) delegated to a conflicts committee consisting solely of independent directors (SEP Conflicts Committee) the authority to review, evaluate and negotiate the transaction on behalf of SEP. The SEP Conflicts Committee unanimously approved the transaction and recommended approval of the transaction to the SEP Board. The transaction has been approved by the SEP Board based on that recommendation. Pursuant to the Agreement, Enbridge has irrevocably and unconditionally agreed to deliver its consent, with respect to all of the SEP common units owned by its wholly-owned subsidiaries, in favor of approval of the transaction. As the majority SEP unitholder (83% of total SEP common units outstanding), Enbridge’s approval by consent will constitute the requisite SEP unitholder vote required to approve the transaction.
Closing of the transaction is expected to occur in the fourth quarter of 2018 and will be subject to customary closing conditions. If the transaction does not close before the record date for SEP’s distribution to be paid in the fourth quarter of 2018, and subject to SEP Board approval, SEP is expected to pay a cash distribution to its unitholders in the fourth quarter consistent with previously disclosed distribution guidance. Based on an expected fourth quarter closing date for the transaction, a SEP unitholder will receive either a SEP cash distribution or an Enbridge cash dividend.
After being filed, SEP unitholders will be able to obtain a copy of the consent solicitation statement/prospectus related to the transaction, as well as other filings containing information about the proposed transaction, without charge, at the SEC’s internet site (http://www.sec.gov).
BofA Merrill Lynch and Scotiabank are acting as financial advisors to Enbridge. McCarthy Tetrault LLP, Sullivan & Cromwell LLP and Vinson & Elkins LLP are acting as Canadian, U.S. legal and tax advisors, respectively, to Enbridge.
Jefferies LLC acted as financial advisor to the SEP Conflicts Committee, while Sidley Austin LLP acted as legal advisor to the SEP Conflicts Committee.
