AltaGas Ltd. has struck a friendly takeover agreement that will double its regulated utility business and give the company a way to tap into Asia's enormous need for fuel.
The Calgary-based company, which has a collection of small energy infrastructure projects across the country, has agreed to purchase Pacific Northern Gas Ltd. in a deal worth $230-million, paying $36.75 per share in cash and absorbing PNG's debt. AltaGas financed the transaction largely through debt and existing credit facilities.
The deal gives AltaGas dibs on PNG's existing pipeline system, which helps connect Canada's western gas fields to Kitimat, B.C. There are a number of proposed liquefied natural gas terminals in the works at Kitimat, and the largest – and most developed – in October received the area's first LNG export licence with its eye on customers in Asia. With existing infrastructure already shipping gas, AltaGas is a step ahead of potential competitors and set to make money off the Asian LNG market, all without actually owning or operating an LNG plant.
"There's a chance to fill those pipes," John Lowe, president of AltaGas' utilities unit, said in an interview. "I see it as a growth story for the utility operations."
The acquisition will boost the size of AltaGas's regulated utility business, bringing it to 20 per cent of the company, Mr. Lowe said. The remaining 80 per cent is composed of gas processing and power generation projects like wind and hydro. The deal is mostly composed of small utilities, with the LNG opportunity coming as a bonus, said Steven Paget, an analyst at FirstEnergy Capital Corp.
He does not expect a hostile bidder to interfere with the friendly agreement because PNG's components are too small to interest others. Further, because AltaGas specializes in operating smaller utilities, a gas business, and diversified power projects, Mr. Paget does not think larger competitors will be interested in buying the expanded, yet still relatively small, AltaGas.
"I have a hard time imagining a competitor deciding it needs to compete in this space so badly that it will launch a hostile [bid for PNG]" he said. PNG is prohibited from searching for other buyers, and AltaGas has the right to match any competing offers. Further, the deal comes with a break fee of $5-million, payable to AltaGas. PNG's largest shareholder, along with directors and senior officers, who collectively control roughly 25 per cent of its stock have signed on to the deal, AltaGas said in a statement. The acquisition needs support from investors holding two-thirds of PNG's shares. It is expected to close in the middle of December.
Robert Kwan, an equity analyst at RBC Capital Markets, along with Matthew Kolodzie, a credit analyst at the same firm, both consider the deal neutral to AltaGas' prospects. On the equity side, it will immediately add to cash flow and earnings, Mr. Kwan noted.
The credit market initially reacted negatively to the deal because of the debt being used to cover the cost, but noteholders calmed as it realized the B.C. expansion further diversifies AltaGas' stomping ground, and doubles the size of its regulated rate business to over $500-million, Mr. Kolodzie said in a research note.
AltaGas said it needs about $140-million to cover the cash portion of the deal, and Mr. Kolodzie noted it had only $3-million in cash on hand at the end of the third quarter.