Morningstar Equity Analyst Report | Report as of 14 Dec 2023Alliance & Aux Sable Transaction Is Win-Win for Enbridge and Pembina Analyst Note Stephen Ellis, Strategist, 14 Dec 2023
We think Pembina's acquisition of Enbridge's interests in the Alliance, Aux Sable, and NRGreen assets for about CAD 3.1 billion is a material strategic win for both parties. We consider the valuation paid at about 9 times 2024 EBITDA or 8 times including expected synergies to be reasonable. This breaks down into about 11 times 2024 EBITDA for the Alliance pipeline, and 7 times for the Aux Sable assets. As a result, we do not expect to change our CAD 41 or USD 29 fair value estimates for Pembina, or our CAD 52 and USD 38 fair value estimates for Enbridge. Our narrow moat rating for Enbridge and our no moat rating for Pembina are also unchanged.
The bigger win is really on the strategic side for both parties. Enbridge obtains valuable capital to finance its planned purchase of three gas utilities from Dominion Energy, and can reduce its leverage further, helping address a key concern for investors. For Pembina, it has acquired high-quality assets that it knows well, given its existing shared ownership stake in all of the acquired assets. More importantly, the capital outlay will likely restrain its appetite for bidding for a stake or ownership of the Trans Mountain expansion pipeline sometime in 2024, limiting the odds of an expensive shareholder capital allocation mistake.
Given Pembina's highly checkered history on mergers and acquisitions, we think investors should be very pleased to see a reasonably priced transaction occur for quality assets with a clear fit with Pembina's existing portfolio. Pembina is financing the deal by offering CAD 1.1 billion of roughly fairly valued subscription receipts to the market with the remainder funded via credit facilities or cash on hand. This transaction is much better priced than Pembina's original acquisition in 2017 of Veresen, which included the original stake in the Alliance pipeline, for an estimated EBITDA multiple of around 12-13 times.