Enbridge is making a big bet on natural gas with the C$37-billion friendly takeover of Spectra Energy Corp., as it looks to grow while facing severe pushback on infrastructure projects.
The all-stock deal with Houston-based Spectra — the largest-ever foreign acquisition by a Canadian company — will create the biggest energy infrastructure company in North America, with a combined value of about $165 billion.
The deal would give Calgary-based Enbridge far more exposure to the natural gas side of the business and extend the company's reach throughout the continent, Enbridge CEO Al Monaco said Tuesday on a conference call with analysts.
"This transaction is transformational for both companies, and results in unmatched scale, diversity and financial flexibility with multiple platforms for organic growth," said Monaco, who will stay on as president and CEO of the larger company.
The deal brings much greater diversity to the two infrastructure companies, said AltaCorp Capital analyst Dirk Lever.
"Enbridge before was very much more of an oily company and Spectra was a gassy company. Put them together and they're balanced," said Lever.
If the deal closes as expected early next year, Spectra will add 140,800 kilometres of gas pipelines to bring Enbridge's total gas lines to 165,600 kilometres, while Spectra will add only 2,720 kilometres of liquids pipelines to Enbridge's existing 27,600 kilometres.
Lever said the resistance companies across Canada and the U.S. have faced in building new resource projects like pipelines has forced companies to look to mergers and acquisitions for growth.
"There's been huge pushback from vocal groups against pipelines," he said, despite the importance of the infrastructure. "They don't care, they just don't want pipelines."
Enbridge has faced stiff resistance for years on its proposed $7.9-billion Northern Gateway project, while large groups of protesters are currently trying to block construction on the Dakota Access pipeline project in the U.S. that it's buying into.
TransCanada Corp. — which faced significant opposition to its Keystone XL pipeline project before the U.S. government rejected it, and continuing opposition to its Energy East pipeline — opted to make a US$13-billion acquisition of Columbia Pipeline Group earlier this year to expand its network.
Barry Munro, head of oil and gas at EY, said energy companies are looking to merge to gain strength, and access cheaper capital, as the energy sector downturn drags on.
"Scale matters," said Munro. "It's always all about capital in the energy business, and the big decisions you have to make about access to, allocation of and the cost of capital."
He said more Canadian companies are also looking to the U.S., both because of the size of the market and because of Canada's increasing regulatory hurdles.
"If you're standing back as a board member and say, 'I have to deploy capital to continue to grow,' you're going to look to where practically you're going to be able to deploy that capital," said Munro.
He said companies are also looking to merge for cost savings. Enbridge says it expects annual synergy cost savings of $540 million from the deal with Spectra.
Lever said he expects to see more mergers and acquisitions as companies look for scale to spread risk and increase opportunities.
"Infrastructure for energy is so critically important and the size of the problems to be solved are so large, that you're more likely to see mergers going forward than not," Lever said.
Monaco said the companies will need to see what divestitures may be required by competition authorities, but he doesn't see much overlap between Spectra Energy's natural gas infrastructure business and Enbridge's oil and liquids operations.
Enbridge would take on about $22 billion in Spectra debt, while Monaco said the company plans to sell about $2 billion of non-core assets over the next year.
Under terms of the deal, Spectra Energy shareholders would receive 0.984 shares of the combined company for each share of Spectra Energy common stock they own. Based on the closing price of Enbridge common shares on Friday, that translates to US$40.33 per Spectra Energy share, representing about a 11.5-per-cent premium to Spectra Energy's closing stock price Friday.
Enbridge's share price closed up $2.05 or 3.9 per cent at $55.30 on the TSX, while Spectra's share price closed up US$4.85 or 13.4 per cent to US$41 on the NYSE.
Merger facts: a look at Enbridge and Spectra Energy as they merge
Calgary-based Enbridge Inc. said Monday it will buy Houston-based Spectra Energy Corp. in a $37-billion cross-border deal that will create the largest energy pipeline and storage company in North America. The deal is expected to close in the first quarter of 2017, pending regulatory approval.
Here is a look at the two companies:
- Headquarters: Calgary
- Market capitalization on Sept. 2: $49.7 billion
- Employees: Nearly 11,000 across Canada and the U.S.
- Founded: April 30, 1949, as Interprovincial Pipe Line Co.
- Growth projects: Enbridge lists $24 billion in commercially-secured projects plus $14 billion in potential capital projects.
- Business: Enbridge operates the world's longest crude oil and liquids transportation system across Canada and the U.S. at 27,600 kilometres. It's also involved in natural gas gathering and midstream operations. It owns and operates Canada's largest natural gas distribution company in Ontario, Quebec, New Brunswick and New York State, and owns nearly 2,000 megawatts of renewable power generating capacity.
Spectra Energy Corp.
- Headquarters: Houston
- Market capitalization on Sept. 2: US$25.3 billion (Cdn$32.5 billion)
- Employees: As of Dec. 31, 2015, Spectra had 3,600 workers in Canada and 2,400 in the U.S. Its 50-per-cent-owned DCP Midstream had 3,200 employees in the U.S.
- Founded: Spectra was formed in 2007 as a spin-off from Duke Energy, but traces its roots to 1911 and the Niagara Falls, Ont.-based Union Gas Company of Canada.
- Growth projects: Spectra has $8 billion of projects currently in execution and aims to add $17 billion in new project growth by 2020.
- Business: In the U.S. and Canada, Spectra has 140,800 kilometres of gas pipelines and 2,720 kilometres of liquids pipelines, 300-billion cubic feet of natural gas storage capacity, 4.8-million barrels of crude oil storage, plus natural gas gathering, processing, and local distribution operations. Spectra owns 50 per cent of DCP Midstream, which owns or operates 61 plants, 12 fractionating facilities and about 100,000 kilometres of natural gas pipeline in the United States.
Sources: Company reports, regulatory filings