Why to Book Profit in Inter Pipeline?

• Canada's Pembina Pipeline Corp (TSX: PPL) said on June 02, 2021, that it would buy rival Inter Pipeline Ltd (TSX: IPL) in an all-stock deal. By adding IPL’s assets to its extensive infrastructure assets PPL would one of Canada's top oil and gas transportation companies.
• Acquisition of IPL by PPL offering a decent premium to the existing shareholders.
• The deal seems to be offering a decent price to IPL shareholders. They would receive half a share of Pembina for each share they own, representing a deal value of CAD 19.45 per IPL share, a 10.8% premium on May 31, 2021, closing price of IPL share.
• The deal represents a premium of approximately 17.8% to the value implied by the takeover bid announced by Brookfield Infrastructure Corporation.

Acquisition highlights

• The Board of Directors of each of Pembina and Inter Pipeline have unanimously approved the arrangement agreement and support the Transaction.
• Transaction is subject to the approval of at least two-thirds of the votes cast by holders of Inter Pipeline shares at a special meeting of Inter Pipeline shareholders.
• The Transaction is expected to close in the fourth quarter of 2021 subject to shareholder and regulatory approval.

Transaction Rationale:

• Near-term synergies of CAD 150 to CAD 200 million annually, which are expected to immediately contribute to meaningful adjusted cash flow per share accretion upon closing of the Transaction.
• Once the Heartland Petrochemical Complex ("HPC") is in full service, the combined company is expected to generate CAD 1.1 billion to CAD 1.4 billion of adjusted cash flow from operating activities after dividends annually, greatly enhancing its ability to fund existing and future capital investment.
• Combination will accelerate and de-risk accretive investment opportunities across various value chains, allowing for deployment of capital into projects at attractive rates of return. In addition to the projects currently under construction, the combined company has visible and highly probable unsanctioned investment opportunities in excess of CAD 6 billion.
• Strong financial platform, in adherence with Pembina's financial guardrails, with the addition of significant long-term contracted cash flow and long-lived underlying assets to Pembina's existing strong foundation.

Stock Recommendation: A the last close (on June 2, 2021), IPL stock gained ~15% since the acquisition news broke out. The company entered into an agreement, where PPL will be offering 0.5 share to the existing shareholder of IPL in exchange of one share they hold. At the end of June 2, 2021, trading session, this transaction values IPL share at CAD 19.01 per share (refer below table)

The closing price of IPL is ~7% higher compared to the fair value of the stock as per the transaction agreement. Hence, we suggest the investor to take out profit from the stock. Therefore, we recommend a “Sell” rating on the stock at the closing price of CAD 20.27 on June 2, 2021.

1-Year Price Chart (as on June 02, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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