Enbridge to buy Spectra Energy in $37B deal

CALGARY – Enbridge is making a big bet on natural gas with the C$37-billion friendly takeover of Spectra Energy Corp., as it looks to grow while facing severe pushback on infrastructure projects.

The all-stock deal with Houston-based Spectra will create the largest energy infrastructure company in North America and one of the biggest energy companies of any kind globally, with a combined value of about $165 billion.

The deal would give Calgary-based Enbridge (TSX:ENB) far more exposure to the natural gas side of the business and extend the company’s reach throughout the continent, Enbridge CEO Al Monaco said Tuesday on a conference call with analysts.

“This transaction is transformational for both companies, and results in unmatched scale, diversity and financial flexibility with multiple platforms for organic growth,” said Monaco, who will stay on as president and CEO of the larger company.

The deal brings much greater diversity to the companies, said AltaCorp Capital analyst Dirk Lever.

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“Enbridge before was very much more of an oily company and Spectra was a gassy company. Put them together and they’re balanced,” said Lever.

If the deal closes as expected early next year, Spectra will add 140,800 kilometres of gas pipelines to bring Enbridge’s total gas lines to 165,600 kilometres, while Spectra will add only 2,720 kilometres of liquids pipelines to Enbridge’s existing 27,600 kilometres.

Lever said the resistance companies across Canada and the U.S. have faced in building new resource projects like pipelines has forced companies to look to mergers and acquisitions for growth.

“There’s been huge pushback from vocal groups against pipelines,” he said, despite the importance of the infrastructure. “They don’t care, they just don’t want pipelines.”

Enbridge has faced stiff resistance for years on its proposed $7.9-billion Northern Gateway project, while large groups of protesters are currently trying to block construction on the Dakota Access pipeline project in the U.S. that it’s buying into.

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TransCanada Corp. – which faced significant opposition to its Keystone XL pipeline project before the U.S. government rejected it, and continuing opposition to its Energy East pipeline – opted to make a US$13-billion acquisition of Columbia Pipeline Group earlier this year to expand its network.

Lever said that given the cost and timelines on these major infrastructure projects, companies are looking for scale to spread the risk and increase strategic opportunities.

“Companies are finding that there’s more strategies if they band together, and there’s more strategic opportunities by doing that rather than build new pipelines that just can’t seem to get off the ground,” he said.

“Infrastructure for energy is so critically important and the size of the problems to be solved are so large, that you’re more likely to see mergers going forward,” Lever said.

Monaco said the companies will need to see what divestitures may be required by competition authorities, but he doesn’t see much overlap between Spectra Energy’s natural gas infrastructure business and Enbridge’s oil and liquids operations.

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Enbridge would take on about $22 billion in Spectra debt, while Monaco said the company plans to sell about $2 billion of non-core assets over the next year.

Under terms of the deal, Spectra Energy shareholders would receive 0.984 shares of the combined company for each share of Spectra Energy common stock they own. Based on the closing price of Enbridge common shares on Friday, that translates to US$40.33 per Spectra Energy share, representing about a 11.5-per-cent premium to Spectra Energy’s closing stock price Friday.