Enbridge Raises All-Stock Offer for Spectra to $3.3 Billion

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Energy infrastructure company Enbridge Inc. (NYSE: ENB) announced Friday morning that it has entered into a definitive agreement to acquire the 81.9 million shares (17% of shares outstanding) of Spectra Energy Partners L.P. (NYSE: SEP) that it does not already own in a transaction valued at $3.3 billion, based on Thursday’s closing price for Enbridge stock. Enbridge already owns 83% of Spectra.

The transaction was first announced in mid-May. At that time Enbridge offered to exchange 1.023 shares of its common stock for each common unit of Spectra. The offer announced this morning raises Enbridge’s offer to 1.111 shares for each Spectra common unit. Enbridge will issue about 91 million shares in connection with the transaction.

In its announcement, Enbridge stated the main benefit to Spectra 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.

By acquiring 100% of Spectra’s outstanding common units, Enbridge eliminates cash distributions to unitholders, replacing them with its own dividend payments. Enbridge currently pays an annual dividend of $2.04, compared to an annual cash distribution to Spectra unitholders of $3.06.

Enbridge said that the transaction is expected to contribute annual growth of 10% to its dividend through 2020. That would bring the dividend roughly equal to Spectra’s current distribution. Current Spectra unitholders will own about 5% of Enbridge once the transaction closes, now expected to occur in the fourth quarter of this year.

Funding new pipeline projects out of internally generated cash flow would mean that cash distributions from MLPs would have to be reduced. That defeats the purpose of the MLP structure, which promises higher cash payments to investors.

When Enbridge and Spectra first announced the transaction in May, the two companies noted a March ruling by the Federal Energy Regulatory Commission (FERC) that would no longer permit MLPs to receive both an income tax allowance and a return on equity based on discounted cash flow. That ruling has since been partially rolled back, but even the rollback is less favorable than before.

By acquiring all of Spectra, Enbridge boosts its own cash flow and improves its access to capital because it can use the cash saved from distributions to reduce its outstanding debt.

Shares of Spectra traded up about 3.3% Friday morning, at $39.10 in a 52-week range of $29.89 to $45.70.

Enbridge stock traded down about 1.6% to $35.43, in a 52-week range of $29.00 to $42.10. The stock’s 12-month price target is $41.66.