Pembina calls $9.7B Veresen takeover ‘magic’

CALGARY Pembina Pipeline Corp. shares tumbled on the news it would acquire midstream rival Veresen Inc. on Monday in a deal worth $9.7 billion including debt, that has the potential of transforming the company into a liquefied natural gas exporter.

Calgary-based Pembina will use its own shares, which fell 3.3 per cent at the close to $42.05, to acquire Veresen and create the third-largest pipeline operator in Canada and the largest natural gas processing company in the basin.

“This is the magic: we’ve become basin diversified, commodity diversified,” Pembina president and CEO Mick Dilger said on a conference call announcing the deal.

Pembina is primarily an oil pipeline company and Veresen is mainly a natural gas pipeline company, but “now we can bring both service offerings to our customers,” Dilger said.

The deal also gives Pembina a stake, alongside Enbridge Inc., in the well-utilized Alliance pipeline between northeastern B.C. and Chicago, a roughly 43 per cent stake in a natural gas processing venture Aux Sable, and 100 per cent ownership of a proposed liquefied natural gas project in Oregon called Jordan Cove LNG.

“We’re excited about Jordan Cove. We think it can happen. We think it might make sense to have partners in there,” Dilger said of the project, suggesting the company could sell portions of the project.

In April, White House adviser and U.S. National Economic Council chair Gary Cohn said the U.S. government planned to approve Jordan Cove, which had previously been denied by the U.S. Federal Energy Regulatory Commission.

Since the price tag for Jordan Cove is estimated at US$6 billion, market observers had doubted Veresen’s ability to fund the project.

Veresen shares jumped 19 per cent following the announcement of the deal, which places a roughly 22 per cent premium on the company’s previous closing price.

The bid price could help prevent a competing bid from American pipeline rivals, which may have been interested in buying Veresen as the company generates most of its earnings in the U.S., Citigroup analyst Faisel Khan said in an interview.

“In the last cycle, in the last year, Canadian pipeline valuations were better than those in the U.S.,” Khan said, explaining why Canadian midstream companies have been purchasing American pipelines.

Khan also said the premium Pembina paid is in line with previous blockbuster deals among Canadian pipeline companies. Enbridge Inc. offered Spectra Energy Corp. shareholders an 11.5 per cent premium in that $37-billion deal, and TransCanada Corp. offered Columbia Pipeline Group shareholders a 29 per cent premium in its own US$13-billion deal.