Enbridge Inc. will simplify its corporate structure by acquiring affiliated master limited partnership (MLP) Spectra Energy Partners LP (SEP) in an all-stock transaction valued at $3.3 billion (C$4.3 billion), the companies announced Friday.
Management for the Calgary-based Enbridge cited the “significant weakening” of capital markets for U.S. MLPs as motivation behind the move.
“If SEP were to continue as a stand-alone entity in such an environment, it would be required to transition to a self-funding model using internally generated cash flow,” Enbridge said. “SEP’s priority would be to strengthen its balance sheet thereby limiting future distribution growth.”
Joining Williams, Energy Transfer and Boardwalk, Enbridge is the latest North American pipeline operator to acquire an affiliated MLP following the Federal Energy Regulatory Commission’s decision to end income tax allowance cost recovery for such partnership structures, a move that made them less financially appealing for housing pipeline assets.
Among the benefits to SEP unitholders, Enbridge noted “reduction in risks related to continued uncertainty and potential unfavorable changes” to FERC’s tax policies for MLPs.
Management said the acquisition carries an “expected neutral impact on Enbridge’s three-year financial guidance through 2020 and positive benefits to Enbridge’s post-2020 outlook primarily due to tax and other financial synergies.”
Enbridge said it expects the deal to improve its credit profile by eliminating SEP public distributions, retaining more cash to support self-funded growth and creating “opportunities to reduce structural subordination of Enbridge debt.”
Through the merger, Enbridge would acquire all 81.9 million of SEP’s public outstanding common units at a fixed exchange ratio of 1.111 shares of Enbridge for each common unit of SEP. Enbridge estimates that it would issue 91 million common shares to carry out the deal, about 5% of its total outstanding common shares.
The boards of both companies have approved the transaction, which is expected to close in the fourth quarter, subject to customary conditions. SEP’s board approved the transaction on the recommendation of a designated conflicts committee comprising only independent directors, the companies said.
Enbridge’s financial advisors in the deal are BofA Merrill Lynch and Scotiabank, with Sullivan & Cromwell LLP and Vinson & Elkins LLP serving as legal and tax advisors. Jefferies LLC has acted as financial advisor to SEP, with Sidney Austin LLP serving as legal advisor.