The Day After: Why Analysts Really Like the Spectra Energy and Enbridge Merger

Sometimes mergers offer great scale. Sometimes they offer great opportunities for streamlining and much lower cost rationale for a combined entity. Other times they are just smoke and mirrors or an effort just to grow in size without much change. In the case of the Spectra Energy Corp. (NYSE: SE) acquisition by Enbridge Inc. (NYSE: ENB), this merger is being touted rather well by investors and analysts alike. The size and scope, and the reasons for liking the deal, are in some cases different reactions than investors are used to seeing in other mergers.

The deal is a merger, but make no mistake here about the size differential. Enbridge has a market cap of $40.8 billion (U.S.) and Spectra has a market cap of $29.4 billion, and Enbridge will also assume consolidated debt of about $14.8 billion (U.S.). The enterprise value of this merger, including the debt, makes this one of North America’s strongest energy players. According to multiple reports, this is now the going to be the largest entity in North America for infrastructure.

Enbridge expects the combined company to be owned 57% by Enbridge holders and about 43% owned by Spectra holders. Another consideration here is the reaction and the analyst calls seen in Enbridge Energy Partners L.P. (NYSE: EEP) and in Spectra Energy Partners L.P. (NYSE: SEP).

Enbridge’s ADSs were trading at $40.99 last week, now they are trading at $43.65 after closing up at $43.06 after the merger. Trading volume in the New York based shares of this Canadian infrastructure giant has been off the chart as well — 26 million the day after the deal was announced, and about 10 million the following day, versus about 1 million shares on an average day.

Spectra Energy shares were also up another 2% at $41.94 on Wednesday, after rising from $36.15 to $41.00 after the deal was announced. Volume here remains strong as well, trading 64 million shares the day after the announcement and then over 20 million shares again on Wednesday.

24/7 Wall St. has already covered who gets what here, for how much, and what some of the benefits were shown to be. What is amazing here is the number of analysts who jumped on the Enbridge bandwagon after the strength was seen.

Some of the price targets were made in Canadian dollars because of Enbridge being in Canada, and the firms are mostly Canadian. The combined company will still be listed on the New York Stock Exchange. Some of these were seen as follows:

  • Canaccord Genuity has a Buy rating and raised its target price (to C$60 from C$57).
  • CIBC World Markets has an Outperform rating and raised its target price (to C$71.00 from C$63).
  • FirstEnergy raised its rating to Outperform from Market Perform and raised its target price (to C$68 from C$55).
  • National Bank raised its rating to Outperform from Sector Perform, and raised its target (to C$63 from C$61).
  • TD Securities has a Buy rating and raised its price target (to C$62 from C$59).

This is a mega-merger for energy infrastructure in North America. Spectra is focused mostly on natural gas pipelines and Enbridge was mostly focused on oil-related assets.

Spectra was seen taking some downgrades, but the reality is that this is quite common for a company being acquired. Raymond James lowered its rating to Outperform from Strong Buy – which hardly seems like a slap in the face.

Another boost here is that Enbridge plans a 15% annualized dividend increase in 2017, with planned annual dividend hikes of 10% to 12% in payouts each year through 2024.

Enbridge Energy Partners was raised to Overweight from Neutral at Piper Jaffray.

Spectra Energy Partners was downgraded to Neutral from Overweight at Piper Jaffray. Another firm called MUFG Securities has a Neutral rating and $54 target for “SEP” units. It said:

We think that SEP’s unit price could show increased volatility from prior levels given the uncertainty that could persist until the first quarter of 2017 expected close of the merger. Moreover, we view management’s ability to provide updates regarding its MLP strategy as potentially more difficult until well-after the close of the transaction. However, we continue to view SEP’s near-term prospects as stable given the highly planned nature of the projects and their likely associated cashflow contributions…

Our Neutral rating is based on our view that SEP is a large-cap, low cash-flow-risk story… We view the partnership’s cash flows as being less risky, on average, than those of the broader MLP space.

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