July 23, 2021

Are you interested in the oil and gas industry, or interested in investing and learning more about the private equity world? This video is for you.

The Inter Pipeline is an oil and gas company with six pipelines, three plants, and two processing facilities. 

In this video, we will talk about the events and conflicts that occurred within the private equity world and how the events explain the changes in its price.

90% correct transcript

What's up guys, Eric here. And today I came across an interesting article from Bloomberg, which talks about the hostile takeover by Brookfield for inter pipeline. So if you are paying attention to the oil and gas industry, or if you're interested in just investing in general and learning more about the private equity world, then this video is for you. So we will just go through the events briefly, and this is not really about, you know, investing in stock or whatnot, but to understand what's happening in the market and explain the changes. Now, enter pipeline is an oil and gas company. They have six pipelines, three plants, two processing facilities, and also a fractionator with 19 million Barrows storage capacity in Western Europe. Um, and they also have a lot of infrastructure and pipeline in Calgary as well, which is where their base. So here you go. We can see, um, this is a map of where they have some of the plants here.
If I click on it, it should be the location of their plant. Okay. There's no additional details, but on the left here, then you'll be able to see the pipelines. And this is their main location with a brief understanding. Let's look at the chart to understand what we are trying to discuss today. So here's the chart for IPL. And if you're not familiar with the charts, because, um, you don't know how to use technical analysis, there is a free course down below that you can just learn technical analysis from me. So what we're trying to explain here is really, since February, 2021, you can see the stock price used to be around $13 and then it jumped to around $17. And as of today, it jumped to $20. So we want to understand, you know, why that is the case, what is the story what's happening? And of course, this is not telling you to invest in us because I wouldn't be investing in it anyways. So it's just helping you to understand what's happening in the market.
Let me just talk about a term called hostile takeover. Now, a hostile takeover is when a acquiring company attempts to take over a target company against the wishes of the target company's management. So basically Brookfield is trying to buy inter pipeline against his wishes. And that brings me to the first Bloomberg article.
Inter pipeline back in March 9th, 2021, they're open to an acquisition by Brookfield infrastructure partner, L T a L P, which is a private equity fund. Obviously there's some conflict there. And the CEO said our is solely about value. If they were to offer a value that it was compelling, that would change the nature of the conversation. Okay. So let's see what they offer. So, um, the Canadian company rejected, Brookfield's hostile takeover bid saying its offer of Canadian dollars, 16.5 per share in cash or stock significantly undervalues the business. And this represents an 18% discount valuation compared to its peers. So when you think about this part, okay, this is as of March 9th. So obviously the discussion has been happening for a while and let's look at the stock price first. So previously to stock price, wasn't really doing anything. And then it jumped up to over 16.5 as the February and a news article came out in March, which is a little bit late, but now with more information, we're able to see why that jump occurred. Okay. So that is quite interesting. So if they don't want to be acquired, what can they do?
So after that, as of June 1st, inter pipeline continues to reject that Brookfield, a hostile bid, which they issued this press release here. And in this case, you'll see that today either reiterate its recommendation, that the shareholders rechecked a hostile takeover bid at the value of 16.5 per share, uh, from Brookfield and right now to unanimously determined that the hostile bid is not in the best interest of the company and its shareholders. And basically they are supporting a strategic combination with PEM BIA pipeline corporation. So basically what is happening is that instead of striking a deal with Brookfield Pembina is going to merge with inter pipeline at a 0.5 shares of Pembina to each share of inter pipeline that they own. So the price is actually at 19.4 or five, share of inter pipeline. Now, at this point, I just want to pause and help you understand what's happening.
The first question we want to answer is it Brookfield to really put a price that is undervalued? And I think the answer is yes, and that's why the CEO is not happy for inter pipeline. If Brookfield would have provided a higher bid than I think that deal would have gone through. And because Brookfield is trying to get basically a discount to buy this asset, they wouldn't be giving the high of a price. Now, when you think about the deal between inter pipeline and Penn BIA, we'll talk more about this in a bit, but because both of them are oil and gas companies, what they will do is a strategic merger or, um, basically combining their business together, which means there is additional synergies, synergies, meaning some cost savings will happen and basically it will make their business more efficient. And at least that is the theory.
So here's the news article on June 1st, where it says Pembina by Canadian pipeline, rival inter pipeline for 6.9 billion. So that is the $19.50 per share that we're looking at. And this is an all stock deal. So the interesting parts about this all stock deal is that have been now we'll just be raising cash from its end, by issuing more shares, um, or just providing the shares to, um, the shareholders of inter pipeline. So they're not necessarily taking more debts, which is a good thing. Um, yeah. So in this case, after that is announced just yesterday, then you can see the stock price actually jumped up to $20.27 now. So keep in mind that the acquisition price is 19.5. So when you think about that, well, there's really, isn't an arbitrage opportunity here for you to take advantage if the deal is about to go through now, of course you don't know for sure, but in this case, if Pembina is buying into, um, pipeline for 19.5 and right now the price is slightly above the acquisition price.
Now, of course, there's more considerations where if you bake into synergy and perhaps there is that arbitrage you're looking for, but it would be a long-term play for sure. Now Brookfield is responding. So June 2nd, which is just now where I read the article and basically Brookfield infrastructure partners raise as hostile offer for inter pipeline to 8.4 billion Canadian, which is 6.9 billion us dollars to break up that deal. And basically right now they're offering 19.75 per share. Now, this is interesting because they're not going over up by a lot. They're actually just spitting slightly higher than Pembina, which is the 19.5. So let me just go back to this article to show you the price 19.45, to be more precise. So when you think about what Brookfield is trying to do, obviously they do have other assets under their belt as well. They are a private equity fund, but if they don't plan to have any merger with their existing assets or trying to make it more efficient, then being bought out by Brookfield is really just a buy and hold.
Of course, Brookfield's team will find ways to make inter pipeline more efficient and trying to drive more value out of the company. But you can see right now it is reaching a price ceiling per se, because if Brookfield thinks that inter pipeline is really worth it, then of course they can bid above $20. Now, one of the interesting question is, well, what would you do if you're management? And if I'm management, then I would actually imagine that being with Penn BIA is actually a better option because they're synergies. Now, if you go with Brookfield, it successfully got acquired by Brookfield. There is that possibility that Brookfield might not do anything. And it is considered to be a hostile takeover because right now, inter pipeline doesn't want to be acquired. But of course, if the price is higher than inter pipeline might be interested, if I'm inter pipeline and I'm acquired by Pepea and I create then Canada's largest pipeline network, and you can imagine the power in terms of pricing, the monopolistic power that these two companies will have combined.
Now, of course, there is a tricky parts where the government might stop it because sometimes you don't want a single company to dominate the market. Um, so they will need to analyze the market, share to see if it would go through. But given that Brookfield is offering a higher price at 19.75, I think chances are to government would approve this Pembina and inter pipeline deal. So now the question is back on peppiness court, where they would offer a price higher than 19.75, and what they would do to see if this deal will go through. But as of June 1st, they issued this press release, which is the Pembina and inter have announced today to have entered into an arrangement already that Pembina will acquire all of the shares for inter four, a share for share transaction. So again, this is not using debt, um, in terms of why I'm keep emphasizing on that is something I teach in investing accelerator when we're analyzing the financial statements.
So moving along, uh, so this value is the inter pipeline common shares at approximately 8.3 billion, which is 19.45 per share. So right now the stock price is a little bit higher. And I think the only explanation for that is really they consider the future synergies and a pricing power to be higher. Once these two companies are combined and this transaction will create one of the largest energy infrastructure companies in Canada with a performer enterprise value of 53 billion. Okay. And then afterwards you can read this on your own if you want to, but basically the near term synergies, which is the cost savings, or they have new product offerings or cross selling will be a hundred to 50, to 200 million annually, which are expected to immediately contribute to a meaningful adjusted cash flow per share, um, accretion upon closing the transaction. Now, when it comes to synergy, based on my experience, it doesn't really happen exactly that quickly.
Uh, so I think this sentence is a little bit more aggressive than it needs to be. Usually when you're planning for synergies is across the next three to five years. So you're not going to see this benefit immediately would be my view. Um, so there's also an additional project, which is the Heartland petrochemical complex, um, and that is currently building and it is not in full service yet, but once it is in full service. And I think that will lead to an additional cashflow, which is 1.1 to 1.4, four inter pipeline. And I think that part where it is still under construction is where the value is. And that's where, um, Brookfield is trying to basically capture, purchase, hold, and then sell at a later date. Okay. Now there's also some interesting, uh, KPIs that you can look at. Basically if you combine both of them together, what would it look like?
So when it comes to the transaction rationale, basically the reasons for the acquisition or merger is to integrate the asset base, basically cross selling, which is the second one, and basically having a larger network to deliver, um, in Western Canada. And they also of course get some synergies, which means there's going to be lay off if there are duplicated functions like HR or accounting or stuff like that. And then there's probably some, some collaboration, um, they can do as well. So you can read this if you want to, but this is a very typical, um, merger scenario where you have two oil and gas companies and they've realized this injuries and then you're fighting against a private equity fund, which can potentially offer a higher bid, but then there might not be as much synergies compared to being acquired by [inaudible]. So that's how you think about it.
So I just thought it was an interesting transaction to go through, um, since it's happening in the news and help you understand what's happening in the market. So that's actually something we do on a weekly basis in investing a celebrator. And that's what we go through and a weekly group coaching call, except we go a lot more in depth into the opportunity itself and figure out how to make a profit from it. Now, in this case, given a news article is already out. I don't think there is a lot of advantage remaining, uh, to make a profit. And as you think the price war will continue, which will it, the price higher and higher. But if right now the stock price is already kind of near its fair value. Then any price increase from this point, onward will probably be a premium, which means the winner of the bidding war will have the winners curse, which means they are overpaying for the asset itself. So if you like this kind of video, then give me a like below, um, that will tell to you to the algorithm that this is a good video.

About the author 

Eric Seto

Investor, CPA (Canada) based in Hong Kong and Vancouver

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