Pembina to buy Inter Pipeline for $6.9 billion amid hostile takeover fight

Two of Canada's largest oil and gas pipeline firms will combine, with Pembina Pipeline saying June 1 it will pay $6.9 billion to acquire Inter Pipeline as a result of Inter's strategic review after a failed hostile takeover bid from Brookfield Infrastructure Partners.

The all-stock deal would give the combined Pembina a total of 6.2 million boe/d of Canadian crude oil, natural gas and NGL pipeline capacity with each company contributing its existing 3.1 million boe/d of capacity. Inter will add 6 million barrels of storage capacity, giving Pembina a total of 38 million barrels of storage.

The deal also includes Inter's Heartland Petrochemical Complex project in Alberta, which is nearing construction completion.

Inter Pipeline had previously rejected a hostile takeover bid from Brookfield for $5.6 billion, calling it a lowball offer. Inter Pipeline's resulting decision to invite other potential offers as part of a strategic review opened the door for Pembina.

Pembina CEO Michael Dilger said this was his company's third attempt to buy Inter in less than a decade.

"The timing is right. Scale matters, service matters. And the synergies here are incredible," Dilger said in a June 1 conference call.

"Look at the fit. I mean, it's perfect," Dilger said. "Operating in the same corridors. We're going to have operating cost synergies. We're going to leverage the infrastructure. We've got a huge amount of spare capacity to grow with the oil sands and also to position ourselves for future opportunities."

The expanded company will continue to be led by Pembina's senior executive team.

Pembina said the majority of the combined asset base is already physically connected or can be connected with relative ease in the future, which will allow for operational integration and and enhanced customer service.

Dilger said they are counting on anticipated growth after the coronavirus pandemic from the Alberta oil sands, as well as from conventional oil, gas and NGL production in the Montney Shale. Canadian production already is back to its pre-pandemic volumes.

In terms of natural gas, "They're in the places we're not," Dilger said, noting that Inter's network goes west into the Pacific Northwest and California, while Pembina's tracks to the east.

And, in areas where both companies operate, they help fill gaps and eliminate reliance on third-party pipelines, he said.

"There's a lot of leakage -- revenue leakage," Dilger said. "So, when you connect the value chain, that leakage goes away."

Petrochemical growth

Pembina said the combined company would offer a 'one-stop-shop' for customers to process, transport and refine condensate and NGLs.

And the Heartland project is de-risked by connecting to Pembina's 60,000 b/d of propane supply infrastructure in Fort Saskatchewan, eliminating the long-term supply risks.

After Pembina's joint venture with Kuwait for a petrochemical complex near Heartland was put on hold last year during the pandemic, Dilger said the combination could help revitalize the project.

"If you can add another plant, I mean, you're amortizing those costs by half, right? And so there's huge synergies," Dilger said. "The CKPC (Canada Kuwait Petrochemical Corp.) project becomes much, much more doable."

Because Kuwait was not involved in the Inter negotiations, Dilger said, "That's one of my calls after I get off this call. So we'll see what's possible."

Before Inter Pipeline put itself up for sale, Inter was searching for a joint venture partner on the Heartland project.

Pembina said the deal is expected to close in the fourth quarter and no major regulatory hurdles are expected.

"We do not anticipate needing to sell any part of the business," Dilger said.

Hostile fight

Brookfield first announced its unsolicited takeover offer on Feb. 10, seeing Inter Pipeline as an underperforming company with valuable Canadian oil sands and natural gas assets that may be primed for a comeback as the industry rebounds from the pandemic. Brookfield, which is the infrastructure arm of Brookfield Asset Management, proposed taking Inter Pipeline private.

Inter's rejection of the hostile bid led to the strategic review and the eventual shakeup.

But the matter is not settled yet. Inter Pipeline reminded its shareholders on June 1 to reject the Brookfield bid by the June 7 offer deadline, although shareholders can reject the Brookfield bid by taking no action.

Brookfield did not immediately respond to a request for comment June 1 and, although it may be unlikely, Brookfield could still try to outbid Pembina.

Inter Pipeline Chairwoman Margaret McKenzie said the comprehensive review made it clear that Pembina had the most compelling offer to make.

"The creation of a more highly integrated business across the energy infrastructure value chain results in a combined entity that is greater than the sum of its parts," McKenzie said in a statement, citing the combined company's stronger financial position.

Pembina and Inter Pipeline combined assets