By: Junaid Rana & Byron Edwardson
Hostile Takeover, Deal Termination, & Now A Friendly Acquisition
Early February of 2021, Brookfield Infrastructure (TSE: BIPC) launched a US$5.7B hostile takeover to acquire Inter Pipeline (TSE: IPL), kicking off an 8-month merger-soap opera. Brookfield is an infrastructure company that operates in Utilities, Transport, Energy, Data Infrastructure, and Corporate sectors. Important to this deal is their Energy segment, which focuses on the movement and storage of energy through large global infrastructure networks. Brookfield is an infrastructure company that operates in Utilities, Transport, Energy, Data Infrastructure, and Corporate sectors. Important to this deal is their Energy segment, which focuses on the movement and storage of energy through large global infrastructure networks.
Following the hostile takeover bid, IPL management urged shareholders to reject the unsolicited offer & decided to put themselves onto the market to attract a higher bid; Pembina Pipeline Corp (TSE: PPL) came calling, an agreement was signed, but then was renegotiated. This deal encapsulates the drama and disingenuousness involved in corporate finance and highlights the complex problems advisors in the M&A market are tasked with solving. This report covers the deal timeline from the initial hostile takeover bid by BIPC (February 2021) to present day (Mid-October 2021) along with an analysis of the final consequences of the deal.
Canadian Takeovers - The Guidelines
A takeover bid at its core is an offer to acquire securities when the securities constitute 20% or more of the outstanding securities. Notably, the bidder cannot purchase securities prior to the bid unless they acquire the same percentage from each shareholder. This is important to stop companies from cutting better terms with some shareholders over others. The Board of Directors will usually issue a recommendation to shareholders to either accept or reject a given bid. A 90% tender acceptance rate is required to force the remainder of the shareholders to accept the bid.
Financing Structure
IPL shareholders may choose up to a 100% cash consideration, or otherwise be given (on a pro rata basis) .250 of Cclass A subordinate voting share of Brookfield. The shareholders of the September tender are opting for 27.5 million IPL shares in cash and 5.6 million IPL shares in class A Brookfield shares. As Brookfield now owns more than ⅔ of IPL shares, they are also able to vote to ensure any minority holdouts are dealt with.
Deal Rationale
Given Brookfield Infrastructure already existing strong portfolio & network Western Canadian Infrastructure assets, their intent to acquire Inter Pipeline is hardly a shock. IPL does have very attractive growth prospects, however, BIPC also has the necessary MGMT skill set along with complimentary companies to fully unlock the intrinsic value of IPL’s rich asset-base. IPL operates numerous key oil pipelines, plants, and energy storage terminals across Western Canada; implying assets with the ability to generate stable cash flows, and paired with the fact that they are supported by long-term fix-rate contracts, they are a fantastic fit for BIPC. It is important to note that BIPC also has a significant presence within Western Canada; Consequently, an acquisition of IPC would create an unprecedented and unrivaled value proposition. Specifically speaking, IPL’s petrochemical projects are attractive to Brookfield as this provides strong projected future earnings growth; It is expected to generate about CA$450M - CA$500M when fully implemented over the long term (2023+). It is likely this growth will materialize, as 70% of the annualized proceeds are already secured by long-term contracts. Furthermore, the acquisition is accretive to BIPC’s EPS, which is favorable for BIPC shareholders and executives.