RBC Comments (what comes next)
July 18, 2021
Inter Pipeline Saga
Have we come to the end of the road?
Our view: In light of Pembina’s statement that it will not raise its offer, we believe the market will shift its focus to whether an alternate transaction with Brookfield Infrastructure Partners (BIP) will come together. As previously set out in our note Permission to Dance? (please click here), we believe a deal to split up the assets could be a win-win-win transaction for all three companies.
Pembina's announcement appears to signal the end of the competitive process
Pembina announced that "it does not intend to increase or otherwise change" its offer consisting of 0.5 Pembina shares for each Inter Pipeline share. While Pembina could be bluffing, we do not believe this to be the case. Even if Pembina wished to materially increase the exchange ratio under its offer, that may still not ensure success given a potential devaluation of its share price. With our view that both Brookfield Infrastructure and Pembina are interested in exploring a split of Inter Pipeline's assets, the question is whether this would occur before Inter Pipeline is sold, or at a later date (if at all).
Pembina: a positive could become even more positive
We believe the market will applaud Pembina's discipline. Assuming Pembina’s statement that it will not raise its offer is not a bluff (i.e., will the ISS recommendation in favour of BIP change things?), we believe many Pembina shareholders will applaud the company’s discipline. We attribute much of the weakness in Pembina's share price last week to concerns that the company would materially increase
its offer for Inter Pipeline.
NGL assets are likely what Pembina wanted all along. When it first began evaluating a transaction with Inter Pipeline in February 2021, Pembina noted in its proxy circular that its original plan was to acquire "certain assets" of Inter Pipeline, which we believe was focused on the NGL assets, instead of the entire company. We think a scaled down transaction in addition to being on the path to receiving a $350 million break fee will provide Pembina with additional financial resources to potentially pursue the acquisition of the NGL assets.
BIP: sitting pretty in the pole position, but good reasons to pursue a deal with Pembina
A successful tender offer appears likely for BIP. As it currently stands, with Pembina’s statement and the ISS recommendation, we expect a “no” vote from Inter Pipeline’s shareholders for the Pembina transaction and a successful tender offer for BIP’s offer that expires on August 6, 2021.
Nevertheless, there are reasons for BIP to look to a deal with Pembina. Given the significant direct and indirect commodity exposure that comes with many of Inter Pipeline's assets (i.e., uncharacteristic of BIP’s strategy and its other assets) and the material increase in midstream exposure within BIP, we believe there is an incentive for BIP to explore a transaction with Pembina. BIP previously sent a proposal to Inter Pipeline's board to negotiate a split of the assets with BIP looking at "certain lower risk, lower return assets", which we believe to be primarily focused on the oil sands pipelines.
Inter Pipeline: certainty versus upside
We believe the market will now look to see if Inter Pipeline’s board will allow BIP and Pembina to negotiate a deal to split up the assets. In our view, considerations for Inter Pipeline's board include whether to permit the two parties to talk, and if so, when to permit the two parties to talk (e.g., now; on July 29 when it is clearer that there will be a "no" vote for the Inter Pipeline-Pembina transaction). On one hand, the board could look to the certainty of the BIP offer with a near-term close based on the expiration date of August 6, 2021. On the other hand, the board could allow the parties to negotiate a transaction to split up the assets with the hope that a superior offer could be delivered to Inter Pipeline's shareholders, albeit likely on an extended timeline.