TransCanada Corp. is undertaking its biggest-ever deal with the purchase of Columbia Pipeline Group Inc. for $10.2 billion, expanding its reach in the U.S. natural gas market.
TransCanada will pay $25.50 a share to Columbia holders, representing a 10.9 percent premium to Columbia’s closing price on March 16, and will also assume about $2.8 billion of debt, it said in a statement on Thursday. The Calgary-based company will fund the purchase with proceeds from asset sales and a C$4.2 billion ($3.2 billion) offering of new shares.
The deal helps TransCanada grow its largest business, gas pipelines, as it faces challenges building new oil conduits. The Acquisition includes more than 15,000 miles (24,000 kilometers) of gas pipelines as well as underground storage and processing facilities owned and operated by Columbia. TransCanada may augment its annual dividend growth rate of eight to 10 percent a year with the purchase, the company said.
“It’s very complementary to what they already have,” Skip Aylesworth, who manages about $1.5 billion in Boston including the Hennessy Gas Utility Fund, said Thursday by phone. Hennessy holds shares of both TransCanada and Columbia. “They have an east-west superhighway in Canada. This gives them a north-south superhighway.”
Potential Reversal
TransCanada already gets the bulk of its revenue, 48 percent in 2015, from gas shipping. Including its Mainline pipeline system that crosses Canada, the company fully owns 35,200 miles of gas lines and has stakes 6,700 more miles, supplying about 20 percent of North America’s heating and power-plant fuel, according to its website. It’s also one of the continent’s biggest providers of gas storage, with 368 billion cubic feet of capacity.
TransCanada has been seeking to grow its presence in the U.S. gas market as production rises from Appalachia fields. Vast supplies of cheap gas from the Marcellus and Utica shale plays are pushing western Canadian volumes out of their traditional markets, as U.S. producers seek new buyers for their fuel north of the border. TransCanada, in turn, has been soliciting commercial support for the potential reversal of its Iroquois pipeline, which has been sending western Canadian gas supplies to the Eastern U.S. for more than two decades.
‘Rare Opportunity’
“The acquisition represents a rare opportunity to invest in an extensive, competitively-positioned, growing network of regulated natural gas pipeline and storage assets in the Marcellus and Utica shale gas regions,” said Russ Girling, TransCanada’s president and chief executive officer, in the statement.
The company has had its eye specifically on getting a pipeline into the Marcellus, which stretches across Pennsylvania and parts of New York, Ohio and West Virginia. Girling said last November that the company may consider an acquisition to grow its Marcellus business, and that it’s cheaper for existing players to build capacity.
The acquisition adds to TransCanada’s U.S. deals in the power and utility space, including the $657 million purchase completed last month of a Pennsylvania power plant from Talen Energy Corp. The offer price represents a 29 percent premium to Columbia’s shares on March 9, the day before reports that the companies were in discussions about a deal.
Asset Sales
TransCanada said its planned sale of power assets in the U.S. Northeast, along with its sale of a minority interest in its Mexican gas pipeline business, will add to proceeds from the equity offering to pay for its purchase of Columbia. The offering of 92 million subscription receipts at C$45.75 apiece represents a 5 percent discount to the company’s closing share price of C$48.15 on Wednesday. Royal Bank of Canada and Toronto-Dominion Bank are the underwriters.
The takeover also comes amid heightened Merger and acquisition activity in the U.S. pipeline space in recent years. The $58 billion purchase by Energy Transfer Equity LP of Williams Cos., announced last September, is the largest in the last decade and part of $127 billion of U.S. pipeline deals announced in 2015, according to data compiled by Bloomberg. Deals worth at least $2.3 billion in the sector have been announced in 2016.
The spinoff of Columbia Pipeline Group by NiSource Inc. was last year’s biggest in the U.S. energy sector. Valued at almost $12 billion, it ranked fourth behind EBay Inc.’s spinoff of Pay Pal Holdings Inc., the HP Inc. separation of its enterprise unit and Baxter Internal’s spinoff of a pharmaceutical unit.
Growth Concerns
TransCanada’s purchase of Columbia may ease investor concerns over TransCanada’s ability to grow over the long term, given that its large pipeline projects have been delayed or blocked. TransCanada has lately been focusing on small- to medium-sized projects to support its annual dividend growth as it struggles to win political support for big oil pipelines including Keystone XL and Energy East.
TransCanada in January opened one of the largest trade appeals ever brought against the U.S., seeking to recoup $15 billion of costs and damages tied to the Obama administration’s rejection of the Keystone XL oil pipeline. The company also sued the U.S. government over the denial of the $8 billion cross-border project.
TransCanada’s exclusive financial adviser was Wells Fargo & Co., while Columbia’s advisers were Goldman Sachs & Co., and Lazard Ltd. TransCanada’s legal advisers were Mayer Brown LLP, Blake, Cassels & Graydon LLP and Osler, Hoskin & Harcourt LLP. Columbia’s legal counsel was Sullivan & Cromwell LLP.
To contact the reporters on this story: Rebecca Penty in Calgary at rpenty@bloomberg.net, Jim Polson in New York at jpolson@bloomberg.net. To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net, Lynn Doan at ldoan6@bloomberg.net, Susan Warren, Jeffrey Taylor
By: Rebecca Penty and Jim Polson
©2016 Bloomberg News