Enbridge to Acquire Outstanding Units of Sponsored Vehicles

In a bid to simplify its corporate structure, Enbridge Inc. ENB has agreed to purchase all of the outstanding stocks of three North American units — Enbridge Energy Partners, L.P. EEP, Enbridge Energy Management, L.L.C. EEQ and Enbridge Income Fund Holdings Inc — for about $7.1 billion.

The consolidation is related to the Federal Energy Regulatory Commission (FERC) tax overhaul, announced in March to reduce certain benefits for the master limited partnerships (MLPs).  The U.S. tax change made it difficult for the MLPs to raise money for new projects. In July, the regulators made major allowances on the initial tax policy change.

However, Enbridge did not defer from its plan of scrapping MLPs. In August, the company revised its original offer to buy Spectra Energy Partners LP by including a premium for the partnership’s unitholders.

The merger of the MLPs will receive all of Enbridge’s core liquids and natural gas assets under a single publicly traded entity. This will be beneficial for all shareholders and unitholders. They will have direct ownership in the largest energy infrastructure company in North America that comprises finest liquids transportation, natural gas transmission and natural gas distribution utility contracts that generate diverse, safe as well as reliable cash flows.

By transferring all the sponsored vehicles under a single roof, the company can considerably lower the complexity of the organizational structure and financial reporting. Having all the core assets under a single entity is likely to be a prudent move for expanding investment appeal and attracting premium valuation. The merger plans, if put into effect under the proposed terms, are expected to have lesser impact on Enbridge’s current three-year financial outlook but will prove conducive to post 2020 guidance owing to tax and other synergies.

Details of the deals

Enbridge Energy Partners unitholders will get 0.3350 Enbridge common shares for each common unit owned, up 8.7% from the exchange ratio proposed by Enbridge on May 17.

Enbridge Energy Management shareholders will get 0.3350 Enbridge common shares for each share owned, which is at par with the Enbridge Energy Partners’ exchange ratio.

The combined value of the aforementioned transactions is around $3.5 billion.

Enbridge Income Fund Holdings shareholders will receive 0.735 Enbridge common shares for each share owned in along with C$0.45 cash, up 9.8% from the exchange ratio proposed on May 16 and 11.3% including the cash component. The assets to be purchased by Enbridge comprise renewable-generation assets and the largest oil pipeline crossing through the United States from Canada.  The transaction is worth C$4.7 billion ($3.6 billion).

Price Performance

In the past year, Enbridge’s shares have lost 16.2% compared with the industry’s 11.5% decline.

 

Zacks Rank & Stocks to Consider

Enbridge currently carries a Zacks Rank #3 (Hold).

A few better-ranked players in the same sector are Petroleo Brasileiro S.A. PBR or Petrobras SA, flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Petrobras is the largest integrated energy firm in Brazil and one of the major players in Latin America. It pulled off an average positive earnings surprise of 10.4% in the last four quarters.

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