Brookfield may need to sweeten its Inter Pipeline offer, analysts say

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Brookfield Infrastructure Partners LP has a good chance of winning a $5.7-billion hostile bid for Inter Pipeline Ltd., as it has been strategically amassing a large stake in a target struggling to win market confidence, but Brookfield may have to up the ante, analysts said Thursday.

Brookfield Infrastructure, a unit of Brookfield Asset Management , said late Wednesday it intends to bid $16.50 a share for the 80-per-cent stake in the Calgary-based pipeline and petrochemical company it does not already own. It is doing so after talks about a potential deal broke off last fall.

Inter Pipeline on Thursday said those discussions led to conditional proposals in the range of $17 to $18.25 a share. It added its board “informed Brookfield that [the proposals] did not reflect the intrinsic value of the company and were not sufficiently pre-emptive to grant Brookfield exclusivity.”

As it bids for the fossil-fuel transporter, Brookfield Asset Management has begun raising billions of dollars to invest in technology to speed up the transition to a net-zero carbon economy. Its chief executive, Bruce Flatt, touted his company’s sustainable investing push during a conference call on Thursday to discuss fourth-quarter results, but he did not talk about the bid for Inter Pipeline.

Inter Pipeline shares surged 29 per cent to $17.32 on the Toronto Stock Exchange, suggesting some investors expect a sweeter offer than Brookfield’s proposed $16.50 bid. Inter Pipeline had been down 38 per cent over the past year, though it recovered somewhat from the drop that accompanied the beginning of the COVID-19 pandemic in March.

The stock has been held back by investor concerns about the company’s $4-billion Heartland petrochemical complex under construction in Alberta. It is $500-million in excess of the initial budget and Inter Pipeline has been searching for a partner to help fund it.

Brookfield started amassing its position in March, 2020, and now owns 19.65 per cent of the company. Even if Inter Pipeline eventually finds a rival bidder, Brookfield has a large block to vote against it. Brookfield said it is willing to pay up to $4.9-billion in cash and the remainder in shares.

Regarding a search for white knights, Inter Pipeline spokeswoman Breanne Oliver said: “Inter Pipeline is open to engaging with shareholders and others to explore opportunities that are going to create value for shareholders.” The company’s board will make a recommendation to shareholders after it receives a formal offer, Ms. Oliver said.

Ian Gillies, an analyst with Stifel FirstEnergy, said he believes a higher bid could be in the offing in what could be a long process, though ultimately successful for Brookfield.

“Status quo is not an option” for Inter Pipeline, RBC Dominion Securities analysts wrote in a note to clients. “Based on our discussions with investors, we believe that there will be support for some sort of initiative to surface shareholder value, whether that be a sale to Brookfield Infrastructure, a sale to another party or an attractive partnership for Heartland,” they said.

Inter Pipeline says it hopes to attract a partner in the project by midyear. Teaming up with a global petrochemical company would lower the capital required for the project, in Strathcona County near Edmonton. The Heartland facility will convert propane into polypropylene plastic pellets used for scores of products, including children’s toys.

Inter Pipeline’s debt complicates the matter, as does the risk associated with completing the Heartland project, according to analysts at Scotia Capital, who assigned “a low probability of a competing offer.”

In July, 2019, the Inter board turned down a $30-a-share takeover bid from CK Infrastructure, controlled by billionaire Li Ka-shing. The offer was at a 30-per-cent premium to where the stock was trading at the time. Inter acknowledged it had been approached but called the proposal “unsolicited, non-binding and conditional.”

As Brookfield Infrastructure went public with its bid, the parent company said it had begun raising money for a US$7.5-billion fund for investing in green technology. “This fund is focused on high-quality sustainable investments that will accelerate the transition of the world to a net-zero carbon economy,” Mr. Flatt said.

In its announcement of the Inter bid, Brookfield said it recognizes investors are increasingly demanding companies meet environmental goals, and said Inter would benefit from its capabilities in pushing for better performance in that arena.

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