Back in May, Enbridge (ENB -0.29%) announced that it had offered to acquire each of its publicly traded entities in a series of transactions that would simplify the company's corporate structure, enhance its credit profile, and reduce the risks associated with an unexpected policy change. After some negotiation, the Canadian pipeline giant has now agreed to merger terms with each of its sponsored vehicles. That puts the company on track to close its megamerger by year-end.
Details of the deals
Enbridge signed the first deal toward the end of August after agreeing to terms with MLP Spectra Energy Partners (SEP) to pay $3.3 billion for the 17% of the company it doesn't already own. The all-stock deal represents a 9.8% increase from Enbridge's initial offer, driven in large part by the improvement in the MLP marketplace since it first proposed the transaction.
Enbridge followed that announcement with two more in mid-September, which covered the rest of its publicly traded entities. In one transaction, the company agreed to acquire Enbridge Income Fund Holdings (TSX: ENF) for 4.7 billion in Canadian dollars ($3.6 billion), consisting of stock and CA$0.45 per share in cash. The new price represents an 11.3% increase from the company's initial offer in May. In addition, the company agreed to terms with its namesake MLP Enbridge Energy Partners (EEP) and Enbridge Energy Management (NYSE: EEQ) on all-stock transactions worth $3.5 billion. Given the agreed-upon exchange ratios, Enbridge is paying 8.7% more for Enbridge Energy Partners than its initial offer and 16% more for Enbridge Energy Management.
How these transactions will impact Enbridge
Enbridge initially offered roughly $8.8 billion in stock to buy out all its sponsored vehicles. However, given the new exchange ratios, the company will end up paying about $10.4 billion to roll up all these entities. Despite that higher cost, Enbridge's three-year financial guidance won't change, nor will its plans to increase its dividend at a 10% annual rate through 2020.
While the transactions will be neutral to that three-year plan, they should deliver significant benefits in both the near and long term. First, by eliminating the distributions these entities paid their respective investors, Enbridge will retain a higher percentage of its internally generated cash flow, which will help finance its expansion projects. That factor will help enhance Enbridge's credit profile, which is getting a further boost by its decision to sell CA$7.5 billion ($5.8 billion) of noncore assets this year.
Further, these transactions will enable Enbridge to avoid the risks associated with the policy change that significantly affected the cash flows of its MLPs and their ability to thrive as stand-alone entities.
Finally, Enbridge sees the potential to capture significant benefits after 2020 by taking advantage of some tax optimization strategies.
By simplifying its corporate structure and improving its financial profile, Enbridge will be in an even better position to grow shareholder value in the coming years. The company will be much less reliant on the capital markets for the funding it needs to expand its portfolio, which will reduce the risk that it would need to cut its high-yielding dividend to finance growth projects or pay down debt.
All the more reason to buy
With merger agreements in place to take all its sponsored vehicles private, Enbridge has taken another step toward easing investors' concerns about its ability to grow its dividend at a high rate in the coming years. Those concerns have weighed on Enbridge's stock over the past year, which is why shares currently sell for around 10.5 times cash flow, dirt cheap compared to most pipeline peers. Add that growth, income, and price to the fact that the company is working hard to mitigate risk, and Enbridge continues to be one of the best energy stocks to buy these days, in my opinion.