Pembina-Inter Pipeline deal secures Heartland petchem supply, foils hostile bid

Pembina Pipeline Corp.'s planned C$15.2 billion merger with Inter Pipeline Ltd. will fill in the value chain "leakage" that has plagued a key petrochemical project and prompted a hostile takeover bid, executives said.

"They didn't have the supply for [the Heartland petrochemical complex] on their own and now … Pembina's the meat in the sandwich they were missing," Pembina President, CEO and director Michael Dilger said during a June 1 conference call. "When Inter Pipeline can't connect the Cochrane [fractionation plant] to [Heartland] and they need to rely on a whole bunch of intermediaries, there's a lot of revenue leakage."

Brookfield Infrastructure Partners LP in February proposed a C$13.5 billion take-private transaction for Inter Pipeline, but the midstream firm rebuffed the formal offer and opted instead to continue the search for a partner that could help take the Heartland petrochemical complex, designed to turn propane into plastics components, to the finish line.

According to Senior Vice President and CFO J. Scott Burrows, Pembina's offer represents a roughly 17.8% premium to the private equity giant's bid and the transaction is expected to close in the fourth quarter. In a separate June 1 release, Pembina "reiterated its recommendation that shareholders reject" a take-private merger with Brookfield.

As of April 22, about 60% of Heartland's production was already contracted under take-or-pay agreements with seven counterparties, which Dilger said was optimal for the combined company.

"I'm pretty comfortable at 60% ... I like what the spreads look like right now. I wouldn't contract any more of that right now, but it doesn't mean we wouldn't do so in the future," Dilger said.

Following the Pembina-Inter Pipeline deal's completion, Burrows said, Pembina will increase its dividend 4.8% to C$0.22 per share and raise it an additional 1 Canadian cent once Heartland comes online. The two companies have a combined C$5.1 billion of projects under construction and expect to realize C$150 million to C$200 million in near-term synergies.

This is not the first time that Pembina has pursued a combination with Inter Pipeline, according to Dilger.

"We tried to combine these companies in my lifetime literally three times: at the infancy of [Inter Pipeline] back when they were an income fund when I was with a different company, we tried eight years ago … and now this is a kind of third time luck," Dilger told analysts and investors. "The industrial logic has existed … the timing is right."

Another part of that logic is that Inter Pipeline's propane will be able to reach global markets via Pembina's Prince Rupert export terminal, according to Dilger.

At the same time, however, he expects Pembina to "shed" some of what it acquires through the merger.

Inter Pipeline shareholders welcomed the announcement, with stock units up more than 8% in mid-morning trading, despite slipping just before the deal announcement. Pembina shares were down slightly under 1%.