Brookfield Infrastructure (NYSE:BIP)(NYSE:BIPC) isn't letting another potential suitor get in the way of its quest to acquire Canadian oil infrastructure company Inter Pipeline (TSX:IPL). One day after its target agreed to merge with rival Canadian midstream company Pembina Pipeline (NYSE:PBA), Brookfield Infrastructure launched a revised offer for Inter Pipeline.
The infrastructure company is taking its latest proposal directly to shareholders as it increases the hostile pressure on the company's management team to accept its offer.
Drilling down into the bidding war
Brookfield Infrastructure and its institutional partners are offering a cash-and-stock acquisition proposal valuing Inter Pipeline at 19.75 Canadian dollars ($16.39) per share. The company would pay 74% of the deal in cash, with the rest of the consideration coming in the form of Brookfield Infrastructure Corporation shares. This offer price is 4.4% above the CA$18.91 ($15.69) per share current implied value of Pembina Pipeline's all-stock deal the two companies agreed to earlier this week.
Brookfield's revised offer is well above its initial proposal valuing Inter Pipeline at CA$16.50 ($13.69) per share, consisting of 76.2% cash and 23.8% stock. Further, it's above the top-end of the range of CA$17.00 to CA$18.25 ($14.11 to $15.15) per share the company said it could offer if Inter Pipeline allowed it to complete its due diligence by providing access to non-public information.
In addition to offering a higher value, Brookfield believes several other factors make its proposal superior to the agreed-upon deal with Pembina Pipeline. These include:
- A significant cash consideration at 74% of the offer price compared to 0% of Pembina's proposal.
- Speed of close at about 20 days versus 180 days for the Pembina deal.
- Certainty of close since Brookfield has already secured all the necessary approvals, whereas Pembina needs antitrust and shareholder approval.
- Preservation of jobs since Brookfield has no employee overlap. On the other hand, Pembina believes it can save $150 million to $200 million per year via cost-saving synergies like eliminating duplicate jobs.
The company hopes that by appealing directly to its fellow shareholders -- Brookfield is Inter Pipeline's largest investor -- they will convince the board it's offering the superior proposal.
Not giving up without a fight
Brookfield is a very disciplined investor. That suggests the company sees significant value potential in acquiring Inter Pipeline, even at a much higher price than initially envisioned.
One of the big value-enhancing catalysts is Inter Pipeline's Heartland Petrochemical Complex. The company expects to complete the project early next year. It has secured long-term purchase contracts for a significant portion of the facility's future production. Because of that, it expects Heartland to generate CA$400 million to CA$450 million ($332 million to $373.5 million) of adjusted EBITDA by 2023. That will boost the company's adjusted EBITDA by roughly 50% from 2020's level. Meanwhile, longer term, the complex should produce CA$450 million to CA$500 million ($373.5 million to $415 million) of adjusted EBITDA per year.
That's not the only draw of Inter Pipeline. It has a solid portfolio of oil infrastructure assets that generate relatively steady cash flow supported by long-term contracts or government-regulated rates. That combination of stability and upside is compelling enough for Brookfield to want to outbid Pembina.
However, the deal makes as much, if not more, sense for Pembina. That's why it made an all-stock offer for the company initially valued at CA$19.45 ($16.14) per share, right around Brookfield's last cash-and-stock offer of around CA$19.50 ($16.18) per share. While its offer price came in slightly below Brookfield's final bid, Inter Pipeline opted for that proposal because it had more upside potential. First, shareholders could see greater share price appreciation as Heartland comes online since they'd own more Pembina stock. On top of that, they'd see the additional benefit from the cost synergies by combining the two companies. That would further bolster the bottom line, creating additional shareholder value.
Brookfield wins either way
Brookfield hopes its latest proposal will convince its fellow Inter Pipeline shareholders that it's offering a better deal. However, even if they disagree, it will still win in the end since it holds a significant stake in the company that would eventually convert into Pembina stock. It could hold those shares for future appreciation while collecting that company's attractive monthly dividend or cash in and move on to another target. So Brookfield investors shouldn't be too disappointed with those outcomes if it loses out on this bidding war.