Inter Pipeline Ltd’s ambitious petrochemical plant was meant to unlock new markets, instead it has left the Canadian company battling cost overruns and vulnerable to a hostile C$7.08 billion ($5.64 billion) takeover from Brookfield Infrastructure Partners.
Some investors have ruled out a rival bid to Monday’s offer for the oil and gas transportation company, and expect Brookfield to snap up Inter just before its newest asset, the Heartland Petrochemical Complex, comes into service.
The C$4 billion Heartland plant near Edmonton, Alberta, is Inter’s first petrochemical project and its largest ever capital investment. It is due for completion early next year, several months behind schedule and C$500 million over budget as a result of the COVID-19 pandemic.
Heartland will boost Inter’s adjusted annual EBITDA, which are earnings before certain items are taken into account, by C$500 million or roughly 50% from 2020 levels. But the project’s cost is weighing on the company’s balance sheet and a lack of information on sales contracts has spooked many investors.
The pandemic also stalled Inter’s search for a joint venture partner for Heartland, leaving the company exposed to cost and construction risks. That has hurt its shares, some investors say, making it an easy takeover target.
“If Inter could have brought a partner in, that could have protected them from this scenario,” said Ryan Bushell, president of Newhaven Asset Management, which owns shares in both companies.
“Inter is stuck between a rock and a hard place. They’re not going to be able to drum up a better offer and Brookfield knows that. They’re buying Heartland basically for free, with a fully running company.”
Bushell said he would prefer Heartland to remain an Inter asset so the company can realise the full value of the project.
In its offer, Brookfield warned shareholders would continue to be exposed to cost overruns and construction delays on Heartland if they rejected the bid.
“There was no value put on Heartland prior to the bid. It’s an undervalued asset and kind of a shiny toy for Brookfield,” said Rafi Tahmazian, portfolio manager with Canoe Financial, which owns shares in Inter Pipeline.
Inter spokeswoman Breanne Oliver said in the current market environment, large costly projects like Heartland do not attract meaningful value until they enter commercial service.
Brookfield formally launched its hostile bid for Calgary-based Inter on Monday, offering C$16.50 a share. Last month, after Brookfield’s initial approaches, Inter proposed a C$24 a share offer to Brookfield, which the suitor spurned. Inter has announced a strategic review.
Inter’s shares were last trading at C$17.82, a sign investors are betting on a sweetened bid.
First announced in 2017, HPC will convert 22,000 barrels per day of propane into 525 kilotonnes a year of polypropylene, a plastic used in a wide range of products. Demand for the plastic is growing worldwide, but margins have been squeezed as the price spread between the propane feedstock and polypropylene has narrowed in recent years and as a new entrant, Inter is struggling to ink supply deals.
Rival Pembina Pipeline Corp suspended a similar project in December, citing significant risks.
The search for a Heartland partner continues, but some investors say Inter will run out of time to find a rival bidder that can trump Brookfield’s offer.
“There are not a lot of parties that can scramble that good a counterbid together in time,” Tahmazian added. 29dk2902l