The deal would combine Pembina’s operations in Alberta’s Deep Basin, Montney and Duvernay formations to Veresen’s pipeline and processing assets in British Columbia. The combined company also would have U.S. interests, such as a natural gas pipeline through North Dakota’s Bakken shale into the Chicago market and a planned natural gas export terminal in Oregon.
Rising production of liquids-rich natural gas in Western Canada is driving demand for new facilities, including larger plants that can break down the hydrocarbons into components used in plastics and fuels. The hunt for added bulk underpinned other deals in the past year, such as TransCanada Corp.’s $10.2 billion takeover of Columbia Pipeline Group Inc. and Enbridge Inc.’s $28 billion acquisition of Spectra Energy Corp.
“There is huge infrastructure that’s needed, and there are a lot of problems to solve,” said Dirk Lever, an analyst at AltaCorp Capital Inc. “These companies need to get bigger to have the scope to handle these massive projects.”
Veresen investors can receive either C$18.65 in cash or 0.4287 of a Pembina share for each Veresen share they hold, the Calgary-based companies said in a statement Monday. The offer represents a 23 percent premium to Veresen’s closing price on Friday.
Veresen surged as much as 21 percent to C$18.40, the highest since 2015, and was trading at $18.14 at 12:11 p,m, in Toronto. Pembina was down 3 percent to C$42.18. Keyera Corp., another Canadian midstream company, rose as much as 6.9 percent to C$40.40 in intraday trading on speculation it might be a takeover target, Lever said.
Pembina is funding the acquisition through its C$2.5 billion unsecured credit facility. It expects to refinance that line with internally generated cash as well as medium-term notes and preferred shares.
Veresen surged last month after White House National Economic Council Director Gary Cohn said the administration of President Donald Trump will permit a liquefied natural gas terminal in the Pacific Northwest. While Jordan Cove was rejected by the Federal Energy Regulatory Commission in last year, Veresen said it plans to file a new application in August.
“The combined entity will continue to build upon the momentum of the Jordan Cove liquefied natural gas development project as it progresses toward key regulatory and commercial milestones,” according to the statement.
Pembina Chief Executive Office Mick Dilger will lead the combined entity, and Pembina’s common shareholders are expected to own about 80 percent of its shares. The company said it will maintain a strong balance sheet, with debt of about four times adjusted earnings before interest, taxes, depreciation and amortization in 2018, according to the statement. Pembina will increase its monthly dividend by 5.9 percent to 18 cents a share.
C$100 Million Savings
Most of Pembina’s natural gas liquids, condensate, crude oil and heavy oil assets are already physically connected to or are in a position to link with Veresen’s gas midstream infrastructure, “with relative ease,” according to the statement. The companies said the deal will help them save C$75 million to C$100 million a year before taxes through lower corporate, financing and operating costs.
The deal “represents an ideal opportunity to continue building on our respective low-risk, long-term, fee-for-service business models while growing and substantially diversifying our respective asset bases,” Pembina Chairman Randall Findlay said in the statement.
The boards of both companies approved the deal, which is expected to close by the fourth quarter pending the approval of Canadian and U.S. regulators as well as at least two-thirds of Veresen’s shareholders.
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“We do not believe the Pembina-Veresen deal should be viewed as overly surprising –- especially after many of Veresen’s self-help approaches (asset divestitures),” analysts from Credit Suisse Group AG wrote in a note Monday. “We regard the deal as being sound for Pembina’s industrial logic at this juncture.”
CIBC World Markets Inc. is acting as financial adviser to Pembina. Blake, Cassels & Graydon LLP is acting as Canadian legal adviser to Pembina and Bracewell LLP is acting as U.S. legal adviser to Pembina. Scotiabank is acting as financial adviser to Veresen and Osler, Hoskin & Harcourt LLP is acting as legal adviser.