CALGARY, AB – Inter Pipeline Ltd. (“Inter Pipeline” or the “Company”) (TSX: IPL) today reconfirms that the Board of Directors (the “Board”) unanimously recommends that Shareholders support the strategic share-exchange transaction with Pembina Pipeline Corporation (“Pembina”) and reject the revised hostile takeover offer (the “Revised Brookfield Offer”) proposed by an affiliate of Brookfield Infrastructure Partners L.P. (“Brookfield”).
The Board’s determination followed careful consideration, including advice from its financial and legal advisors, and the recommendation of a special committee of independent directors (the “Special Committee”). To reject the Revised Brookfield Offer, simply take NO ACTION. If you have tendered your Shares in error and wish to withdraw, simply ask your broker or contact Kingsdale Advisors (see contact information below) to assist you with this process.
“The proposed combination with Pembina provides Inter Pipeline shareholders the ability to participate in a large, highly integrated energy infrastructure business with significant potential growth opportunities across the value chain, including additional future cash flow from the Heartland Petrochemical Complex,” said Margaret McKenzie, Chair of the Board and the Special Committee. “The strategic combination with Pembina supports an immediate increase in dividend yield and the ability to participate in meaningful anticipated commercial and operational synergies. In addition, following our thorough analysis, we expect the intrinsic value of this business combination to be in excess of $19.45 per share for Inter Pipeline shareholders, and superior to the Revised Brookfield Offer.”
A Notice of Change to Directors’ Circular (the “Notice of Change”) providing the full details concerning the Board’s recommendation, including the reasons to APPROVE the strategic combination with Pembina and REJECT the Revised Brookfield Offer and the background to both offers is available on the Company’s website at www.interpipeline.com and at www.sedar.com. The Notice of Change is also being mailed to all persons required to receive a copy under applicable securities laws.
The Notice of Change also includes a Letter to Shareholders summarizing the reasons why Shareholders should APPROVE the strategic combination with Pembina and REJECT the Revised Brookfield Offer. The full text of the Letter to Shareholders is provided here:
Dear Fellow Shareholder,
The board of directors (the “Board”) of Inter Pipeline Ltd. (“Inter Pipeline” or the “Company”) unanimously recommends that you approve an all share combination with Calgary-based Pembina Pipeline Corporation (“Pembina”). Under the terms of the Arrangement Agreement with Pembina (the “Arrangement Agreement”), for each Inter Pipeline Common Share (the “Common Shares”) that you own, you would receive 0.5 of a Pembina Common Share (the “Exchange Ratio”) by way of a statutory plan of arrangement pursuant to the Business Corporations Act (Alberta) (the “Pembina Arrangement”).
The Special Committee and the Board believe the Pembina Arrangement is superior to the alternative proposed by an affiliate of Brookfield Infrastructure Partners L.P. (“Brookfield”) – a revised hostile takeover offer (the “Revised Brookfield Offer”) under which Brookfield proposes to buy your shares for cash, shares of Brookfield Infrastructure Corporation (“BIPC”), or for eligible electing Shareholders, units of Brookfield Infrastructure Corporation Exchange Limited Partnership (“Exchange LP”), or a mix of cash, BIPC shares and/or Exchange LP units, as applicable. The attached Notice of Change to Directors’ Circular (“Notice of Change”) includes a summary of the Revised Brookfield Offer under the heading “Notice of Change to Directors’ Circular”.
The Board is of the view that retained ownership in the combined entity resulting from the Pembina Arrangement will provide you with greater value, underpinned by both the combined business’ synergies, growth prospects, dividends and future investment opportunities. Moreover, the Pembina Arrangement offers you the opportunity to continue to benefit from the future value of Inter Pipeline’s existing business, with Shareholders holding approximately 28% ownership of the combined entity.
We urge you to carefully read the attached Notice of Change, which provides the complete list of reasons to APPROVE the Pembina Arrangement and REJECT the Revised Brookfield Offer. Meanwhile, here in summary form are some of the factors the Board considered in reaching these recommendations.
1. The consideration under the Pembina Arrangement has an implied value, which is greater than the value of the Revised Brookfield Offer
Due to the strategic nature of the Pembina Arrangement (including significant expected synergies and strong combined growth prospects), and Shareholders’ expected approximate 28% ownership of the combined entity, the intrinsic value of the Pembina Arrangement is expected to be in excess of the $19.45 per Common Share ‘headline’ value of the Exchange Ratio (the “Headline Value”), and higher than the value of the Revised Brookfield Offer.
The Board is confident that the value of the consideration will grow over the long term, more than offsetting any minor variations in the value of the consideration due to temporary and expected market fluctuations that are likely to arise prior to the expiry of the Revised Brookfield Offer.
As noted in the table below, the value of the Pembina Arrangement consists of the Headline Value (being the closing price of the Pembina Common Shares on May 31, 2021 multiplied by the Exchange Ratio of 0.5) plus the value of the expected synergies. Together, this combination makes the value of the Pembina Arrangement greater than the value of the Revised Brookfield Offer.
Value per Common Share Based on May
Board-Supported Pembina Arrangement
Headline $19.45 per Share
Headline Value PLUS $0.65-0.75(1) per Share
per $100 Million per Year of Synergies
Revised Brookfield Offer
($19.21(3), Assuming the Shareholder Receives
100% Share Consideration)
Per every $100 million increment of potential synergies; assuming a 10 to 12x valuation multiple. The incremental value per share estimate is calculated by multiplying $100 million by 10 to 12x and dividing the product by approximately 765 million Pembina Common Shares that are expected to be outstanding following completion of the Pembina Arrangement, and multiplying the quotient by the Exchange Ratio of 0.5.
Estimate calculated reflecting the pro rata value of the Revised Brookfield Offer of $5.56 billion of cash, 23.0 million BIPC Shares valued at BIPC’s closing price of $85.35 on May 31, 2021, divided by 387.4 million Inter Pipeline Common Shares not owned by Brookfield.
Estimate based on an exchange ratio of 0.225 multiplied by BIPC’s closing price of $85.35 per share on May 31, 2021.
Pembina has publicly disclosed the potential for meaningful near and longer-term synergies from the Pembina Arrangement. As holders of Pembina Common Shares following the completion of the Pembina Arrangement, Shareholders who retain Pembina Common Shares will participate in the value of such synergies to the extent realized.
Also, Inter Pipeline Shareholders under the Pembina Arrangement will retain, as holders of Pembina Common Shares, an implicit 28% interest in the Heartland Petrochemical Complex (“HPC”), which is expected to provide material upside with $400 to $450 million of EBITDA in 2023 (the first full year of operations) and $450 to $500 million of long-term EBITDA annually. Under the Revised Brookfield Offer, the upside to you from HPC (and from Inter Pipeline’s other assets) may not be available or would be so diluted as to be unnoticeable.
The combined business resulting from the Pembina Arrangement is also expected to accelerate and de-risk accretive investment opportunities across various value chains, allowing for the opportunity to deploy capital into projects at attractive rates of return. In addition, the combination is expected to be accretive to long term cash flow, providing Inter Pipeline Shareholders with meaningful share price upside potential.
2. The Pembina Arrangement supports an immediate increase in dividends payable to Shareholders post-closing, as well as long-term dividend growth potential in the combined company
Pembina’s dividend yield is significantly higher than Brookfield’s. Shareholders who receive BIPC Shares or Exchangeable LP Units under the Revised Brookfield Offer would receive lower dividends than they would from the combined company following completion of the Pembina Arrangement. Moreover, Brookfield’s dividend is only payable quarterly, whereas Pembina and Inter Pipeline dividends are payable monthly. Canadian residents will also be subject to currency exposure on each dividend payment as dividends on BIPC Shares are declared in U.S. dollars.
Pembina Has a Higher Dividend Yield than Brookfield
Note: Dividend yield as of May 31, 2021. Based on Pembina’s guidance of a $0.23 per month dividend following the successful commission and start-up of HPC, Pembina’s dividend yield would be 7.1%.
If you retain Pembina Common Shares pursuant to the Pembina Arrangement, you will have the opportunity to participate in future dividend growth on Pembina Common Shares. Upon closing of the Pembina Arrangement, you would benefit from an immediate 175% increase to your current monthly dividend of $0.04 per Common Share, assuming an increase in the Pembina dividend to $0.22 per Pembina Common Share, as well as a further increase of $0.01 to the monthly dividend which Pembina has confirmed its intention to implement following the successful commissioning and in-service date of HPC. Furthermore, Pembina has a strong track record of consistent dividend increases.
3. Pembina Common Shares have highly attractive characteristics
Holders of Inter Pipeline Common Shares will become shareholders in one of the largest Canadian midstream companies with a ~$29 billion equity market capitalization and ~$52 billion enterprise value. Pembina Common Shares historically have been, and post-transaction are expected to continue to be, highly liquid securities. As a result, the consideration provided in the Pembina Arrangement provides immediate liquidity to Shareholders should they wish to monetize the Pembina Common Shares received. The Pembina Common Shares historically have had more trading liquidity than the BIPC Shares and more than the Common Shares.
The exchange of Common Shares for Pembina Common Shares can be completed on a fully tax-deferred basis for Canadian resident Shareholders. However, while the Revised Brookfield Offer does provide a tax-deferred option for certain Canadian Shareholders wishing to accept its exchangeable unit alternative, most Shareholders will not benefit from a tax-deferred exchange to the extent they elect to receive cash or are otherwise limited by proration to the amount of exchangeable units received. Depending on a Shareholder’s tax basis in Common Shares held and form of consideration received, the Revised Brookfield Offer could result in lower after-tax value received at closing than the tax-deferred Pembina Arrangement. U.S. resident Shareholders also may be eligible for a tax deferred rollover in connection with the Pembina Arrangement.
4. The Pembina Arrangement was the result of a full and fair strategic review process and is supported by all of Inter Pipeline’s directors
The Pembina Arrangement was determined to be the preferred strategic alternative available to Inter Pipeline and its Shareholders following the conclusion of Inter Pipeline’s thorough Strategic Review, which was conducted by a special committee of independent directors (the “Special Committee”) and included advice from financial advisors, TD Securities and J.P. Morgan, and legal counsel, BDP and Dentons.
Following receipt of confidential information, Brookfield and all other interested parties were provided multiple opportunities to put forward an offer that would be compelling for Shareholders and that would receive Inter Pipeline Board support.
Brookfield was notified on May 31, 2021, that Inter Pipeline was prepared to accept a competing en bloc proposal with market standard deal protection provisions, including a “break fee”. Brookfield’s response to this notification was to deliver a further revised proposal that, in the view of the Special Committee, was still inferior to the Pembina Arrangement.
“Break fees” are a customary deal protection feature in transactions similar to the Pembina Arrangement and the quantum of the break fee in the Pembina Arrangement is within the range of market precedents for transactions of this nature. Furthermore, break fees tend to be higher for transactions announced following a thorough auction process (similar to Inter Pipeline’s Strategic Review).
5. Provisions in the Pembina Arrangement Agreement materially reduce the risk to closing Due to regulatory matters
The Arrangement Agreement with Pembina contains favourable provisions which require Pembina to assume the risk of any regulatory delay or remedy under the Competition Act and close the Pembina Arrangement in a timely manner. These “hell or high water” provisions protect the interests of Shareholders by limiting the ability of Pembina to delay closing of the Pembina Arrangement due to ongoing regulatory review.
We believe that meaningful challenges are unlikely due to the complementary nature of Inter Pipeline and Pembina’s operations, and are advised by our legal counsel that these provisions in the Arrangement Agreement reduce the risk to closing of a transaction with Pembina.
6. TD Securities and J.P. Morgan have provided fairness opinions in respect of the Pembina Arrangement.
APPROVE the Pembina Arrangement and REJECT the Revised Brookfield Offer
For the reasons fully described in the attached Notice of Change, the Inter Pipeline Board UNANIMOUSLY recommends that Shareholders APPROVE the Pembina Arrangement and REJECT the Revised Brookfield Offer.
Inter Pipeline Shareholder Meeting
Further information regarding the Pembina Arrangement will be contained in a joint information circular that Inter Pipeline and Pembina will prepare, file and mail in due course to their respective shareholders in connection with the meetings for the Inter Pipeline Shareholders and the holders of Pembina Common Shares scheduled to be held on July 29, 2021. The Pembina Arrangement is currently expected to close late in the third quarter or early in the fourth quarter of 2021. The joint information circular will contain the details concerning the Pembina Arrangement, the Arrangement Agreement and the support of the Special Committee and the Board for the Pembina Arrangement.
To reject the Revised Brookfield Offer, simply take NO ACTION. If you have tendered your Common Shares in error and wish to withdraw, simply ask your broker or contact Kingsdale Advisors for assistance. You can reach Kingsdale Advisors at 1-877-659-1820 (416-867-2272 for collect calls outside North America) or by e-mail at firstname.lastname@example.org. For more information, please go to www.interpipeline.com.
On behalf of the Board and the Special Committee, I would like to thank you for your consideration and your support.
Chair of the Board and the Special Committee of Inter Pipeline