CALGARY – An activist investor is urging pipeline and power giant TransCanada Corp. (TSX:TRP) to make big changes to its corporate structure in order to boost its share price.
In a letter released Monday, Sandell Asset Management Corp. said the Calgary-based company hasn’t made the most of its master limited partnership, TC Pipelines LP — a publicly traded vehicle with tax benefits into which TransCanada has been transferring some of its U.S. assets.
It also wants TransCanada — the company behind the contentious Keystone XL pipeline proposal — to spin off its power business and do a better job communicating its cash flow metrics in its financial reporting.
Sandell believes if TransCanada follows its recommendations its share price can reach $75. The stock closed up 77 cents at $56.57 on the Toronto Stock Exchange on Monday.
“Despite our enthusiasm for TRP and its prospects, we are disappointed that the company has been slow to evolve,” CEO Thomas Sandell wrote in his letter to TransCanada’s board of directors.
Sandell said the company’s peers — including Enbridge Inc. (TSX:ENB), Spectra Energy Corp., Oneok Inc. and Williams Companies — have “unlocked substantial value” from their master limited partnerships, whereas TransCanada has shown a “surprising indifference” toward its own.
Sandell also believes it’s not necessary for TransCanada’s massive North American oil and gas pipeline business to be under the same corporate umbrella as its power business, which includes renewable and natural gas-fired power generation and an interest in the Bruce Power nuclear plant in Ontario.
“In a separation, we believe the energy business will be able to attract world class management to manage upcoming opportunities and challenges and attract dedicated shareholders and sell-side analysts who can best analyze the underlying drivers of the business,” Sandell wrote.
“Furthermore, as a stand-alone entity, TRP’s stable pipeline business will be insulated from energy’s more volatile cash flows and exposure to uncertainties in the Alberta power market, yielding a higher, more industry-comparable multiple for the pipeline business.”
Sandell also said TransCanada should emphasize its measures of cash flow, rather than earnings per share, in order to highlight for investors the company’s “ample tax assets, low maintenance capital requirements and capacity for dividend payment.”
Sandell, which has offices in New York and London, released its letter and accompanying “white paper” two days ahead of TransCanada’s investor day in Toronto.
In a release, TransCanada said it received a “flawed analysis” from Sandell a few months ago that was very similar to the one published on Monday.
“After careful review, and ongoing discussions with our other shareholders, TransCanada firmly believes that our current strategy best positions us to deliver long-term value to investors,” the company said.
“TransCanada has established itself as a leading energy infrastructure company in North America with a blue-chip portfolio of assets that has consistently delivered attractive and sustainable growth in earnings, cash flow and dividends. Importantly, the company has delivered a 15 per cent annualized total shareholder return since 2000.”
According to a quarterly filing with the U.S. Securities and Exchange Commission, Sandell held 713,508 shares in TransCanada at Sept. 30. The investment was worth about $40.4 million based on TransCanada’s share price Monday.
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