of Canada and of the US have agreed a merger to create the largest oil and gas pipeline group in North America, with an enterprise value of $127bn, in the latest of a wave of deals that has swept through the industry in the past couple of years.
The deal comes as the slowdown in the North American oil and gas industry caused by the slump in prices has raised about the growth prospects of pipeline operators.
The all-share transaction values Spectra at about $28bn, or $40.33 per share, based on the closing prices on Friday evening. That valuation is at an 11.5 per cent premium to Spectra’s share price on Friday.
The deal would give Enbridge shareholders 57 per cent and Spectra shareholders 43 per cent of the merged group. It is scheduled to close in the first quarter of next year.
Enbridge operates about 33,000 miles of oil and gas pipelines and 79 liquids terminals in Canada and the US. Spectra specialises in gas, with about 88,000 miles of pipelines and storage capacity of 300bn cubic feet.
In the year to the end of June, the two companies would have generated combined revenues of $31bn and earnings before interest and tax of $4.4bn.
The deal is expected to generate ultimate cost savings of $415m per year from cost cuts, and a further $200m per year in tax benefits.
Al Monaco, chief executive of Calgary-based Enbridge, said in a statement the deal would be “transformational” for both companies, giving them “unmatched scale, diversity and financial flexibility with multiple platforms for organic growth.”
He added that the merged group would have $20bn of projects under construction and another $37bn under development, allowing Enbridge to extend its planned annual dividend growth of 10-12 per cent out to 2024. It is proposing a 15 per cent increase in the payout next year.
Greg Ebel, Spectra’s chief executive, said the strength of the combined company would “support a large capital programme to fund the continued development of Spectra Energy’s existing, pre-eminent project inventory”, as well as allowing the combined company to compete for the most attractive growth projects.
Mr Monaco is intended to remain chief executive and president of the merged company, which will be called Enbridge and keep its headquarters in Calgary. Mr Ebel is to be non-executive chairman.
The agreed deal follows a couple of years in which the pipeline business has been the most active sector of the North American oil and gas industry for merger and acquisition activity.
Last year MPLX for $17.4bn including debt, and Energy Transfer Partners bought its affiliate for $17bn.
Williams agreed a deal to be bought by Energy Transfer Partners, which , and subsequently rebuffed a from Enterprise Products Partners.
The slide in oil prices that began two years ago has raised investors’ fears that pipeline operators, which typically distribute a high proportion of their revenues to investors, may not be able to sustain their payouts. Kinder Morgan, the largest US pipeline company, cut its dividend last year.
Enbridge and Spectra said the merged company would be able to deliver its dividend growth while maintaining a “conservative” payout of 50-60 per cent of available cash flow from operations.
Mr Monaco said the deal would “preserve and enhance our shareholder value proposition, which centers on delivering consistent growth with a low-risk business model.”