One week ago, as part of a plan to simplify its structure, Calgary-based Enbridge Inc. announced a deal in which it would offer 272 million of its own shares to acquire all the outstanding shares of its four sponsored equity vehicles, three of which are U.S.-based.
The proposed $11.4-billion related-party transaction requires the formation of special committees, the receipt of fairness opinions and shareholder votes.
Shareholders of the parent have reason to like the deal because, at long last (assuming the transactions are approved), it will be easier for analysts and investors to get a better handle on Enbridge, which had been hamstrung by a lower-than-expected valuation. That translates into a higher cost of capital than otherwise.
And Enbridge didn’t hold back: it wanted all its sponsored vehicle entities to be 100-per-cent owned, including its Canadian unit, 20-per-cent owned Enbridge Income Fund Holdings.
Action was required for the three U.S. entities because of recent negative tax changes governing master limited partnerships (MLPs.) As Enbridge said at the time, the buy-in “addresses Enbridge’s risks related to Federal Energy Regulatory Commission MLP tax allowance elimination,” while such investors will benefit from being part of a larger and more diverse company.
Enbridge also included the Enbridge Income Fund (ENF/TSX) in the buy-in, a planned move that has not enamoured some investors in the Canadian company.
Their lack of support focuses on four key points: the lack of a premium, given that a takeover is at work; the lack of a strategic need to be acquired because the tax changes that motivated the U.S. buy-in are not present in Canada; the cut in dividends they stand to receive under the proposed fixed exchange ratios; and the optics.
Let’s take those negatives one at a time. As for the premium, there isn’t one, unless you view a five-per-cent bump as enough of an incentive to forgo ownership. “Typically, when one company is acquiring another (even if it’s a related party) a meaningful premium in the unaffected stock price is offered and it’s generally in the 20-per-cent to 30-per-cent range,” noted one banker.
On the second point, there doesn’t appear to be a need to bring Enbridge Income Fund in-house. Given that there are no negative implications to ENF from the U.S. tax changes, there is no need to restructure the Canadian unit. If Enbridge wants to buy the unit (whose ability to cost-effectively raise capital has deteriorated, according to Enbridge) then, runs the argument, offer shareholders a reasonable premium.
On the third point, ENF shareholders currently receive $0.1883 a month or $2.26 a year. Under the proposed exchange ratio of 0.7029 Enbridge share per ENF share, that dividend will fall to $1.89 a year payable quarterly. ENB currently pays $0.671 a quarter — or $2.684 per year.
“Why would a current shareholder accept this when there is no need to restructure ENF, other than for Enbridge’s benefit,” the banker asked.
The final point is optics — and they are pretty strong. Enbridge is planning to buy back the ENF shares at a lower price than it sold the same shares at in April 2017. Then, it offloaded 17.348 million shares at $33.15 a share; based on the fixed exchange ratio and the share prices at the time of the announcement, the current “offer” works out to $29.38 a share.
Maybe opportunism — given that retail investors are large owners — is the real motivation behind buying in the Canadian unit. Anyway there is more than enough material for the independent directors on the special committee to assess the fairness.