Brookfield Infrastructure Partners Hostile Bid for Inter Pipeline Ltd.
A hostile takeover is an acquisition of a Target company in which Acquirer directly approaches the shareholders of the Target company to get the acquisition approved or to replace the Management team. In such cases, board of directors of the Target company has rejected the offer. A tender offer or a proxy fight are the typical two methods for execution of a Hostile Bid. In a hostile takeover, Target company share prices increase on the announcement of the hostile bid more than in a friendly merger. In response to the hostile takeover, Target company can use several defenses including:
- A Shareholders’ Right Plan: this is a poison pill strategy in which the plan allows the existing shareholders of the Target company to purchase shares at a significant discount to the market price, thereby diluting the ownership of the Acquirer and making it quite costly to takeover the Target. This approach also buys the board of directors time to find other alternatives or strategic partners.
- A Voting Rights Plan: this is a clause added to the Target company’s charter by the board of directors. This clause restricts the voting rights of the existing shareholders who own a predetermined percentage of Target shares from voting on certain issues. Consequently, Management can prevent Acquirers from voting on the acceptance or rejection of transactions or takeovers. Under the Voting Rights Plan, Management can change the majority percentage of votes required for approval of mergers and increase the percentage of approval required, making it impossible for Acquirers to takeover the company.
- A Staggard Board of Directors: this approach makes it quite time consuming for Acquirers to replace the Target’s board of directors through a proxy fight. In such case, directors of the Target board are elected at different times for multi year periods and not all at the same time.
- Greenmail: in this case the Target purchases its own shares at a premium from corporate raiders to prevent the takeover.
- White Knight or Strategic Partner: this strategy allows the Target to sell the company to a friendly bidder who will keep the Management in place and provides shareholders with a better offer price and alternatives. This approach is generally the last resort once the Management has run out of options; however, if the combined value of the merged entities and financial and operating performance is not accretive to the Acquirer and fails to achieve the anticipated benefits, this approach could fail.
- Increasing Debt: Management of Target can intentionally increase the debt burden on company’s balance sheet to ward off the corporate raiders. This creates concerns with respect to the financial viability of the company post acquisition and its inability to meet large debt obligations. Over the long term, this strategy could hurt the existing shareholders of the Target as it directly impacts Target’s share price in the public markets.
- Acquiring Other Companies: Management can acquire other companies through a combination of stock, cash or debt and thereby dilute the ownership of corporate raiders. A suitable strategic acquisition at the right price can also benefit shareholders through realization of synergies.
- Acquiring the Acquirer: Target company can make its own bid to acquire the Acquirer. This approach is rarely successful and to the detriment of shareholders due to the increased level of debt, potential dividend decrease and drop in share price.
- Triggered Option Vesting: under this approach the board of directors add certain clauses to the corporate charter that in the event of acquisition of the company or change of control, all unvested options become vested and paid for by the Acquiring company, hence making it expensive for the corporate raiders to take over the Target as they have to meet the large expense associated with vested options.
Brookfield Infrastructure Partners Hostile Bid for Inter Pipeline Ltd.
The following is an overview of Inter Pipeline Ltd. Hostile Takeover by Brookfield Infrastructure Partners L.P. in 2021, post 2020 oil market crash and global COVID-19 pandemic. Take Over Defenses implemented by Inter Pipeline to ward off Brookfield Infrastructure is further discussed.
On Feb 10, 2021, Brookfield Infrastructure Partners L.P. with its institutional partners (“Brookfield Infrastructure” or “BIP”) announced its intention to acquire all the outstanding common shares of Inter Pipeline Ltd. (“IPL”, “Inter Pipeline” or the “Company”) not owned by BIP at a price of C$16.5 a share in a hostile takeover for $6.392 billion. The Expiry Date of this offer is June 7, 2021.
Brookfield offer price of $16.5 per share is a 23% premium to IPL share price and a 25% premium to IPL 30-day VWAP as of Feb 10, 2021. Given the opening of the economies, mass vaccination and improved oil and commodity market fundamentals, IPL cash flow generation prospects and share prices have improved in 2021. The offer, though attractive to Brookfield Infrastructure shareholders and institutional partners, is to the detriment of IPL shareholders as IPL intrinsic stand-alone valuations as of the date of this analysis on May 21, 2021, is significantly above the offer price. Brookfield restrictive covenants such as redeemability of BIPC shares at Brookfield Infrastructure’s discretion and at any time to BIP units is not in the benefit of current IPL shareholders since BIP shares have on average traded at an 18% discount to BIPC shares. Given its business fundamentals, Inter Pipeline is not a suitable target based on the three pillars of leveraged buyout, value, control and especially from a leverage standpoint. With a purchase price (enterprise value) of $14,351 million, net debt balance of $7,269 million, an implied equity purchase price of $7,082 million and $3,142 million asset write ups, goodwill destroyed in the transaction is equal to $275 million. The nature of Brookfield Infrastructure capital recycling strategy points to the expectation of BIP recycling Inter Pipeline to low cost of capital buyers in the coming years at high to mid teen returns.
In response to the Hostile Bid, IPL has adopted a Supplemental Shareholder Rights plan, has so far contracted 60% of the growth project, Heartland Petrochemical Complex (“HPC”), production capacity under long-term take-or-pay contracts and has secured a $408 million cash grant under the Alberta Petrochemicals Incentive Program. IPL Special Committee continues to search for strategic or capital partners for the HPC project.
Consequently, Modelyze Investments believes that Brookfield’s current offer price of $16.5 per share has significantly undervalued IPL operations, taken advantage of deteriorating Oil & Gas industry fundamentals and the outflow of funds from the carbon intensive sectors during the pandemic, and undermined the future growth prospects of assets such as Heartland Petrochemical Complex. Overall, Modelyze Investments issues a BUY recommendation with an Average risk rating at a target price of C$21.58 per share as of the date of the analysis.
For comprehensive analysis of IPL operations, the deal, IRR of privatization, and IPL valuation, refer to Basic Modelyze to read Brookfield Infrastructure Partners Hostile Bid for Inter Pipeline Ltd.
Conclusion of the Deal
Brookfield initial offer for IPL expired on June 7th; however, BIP considered further enhancements to its offer price and raised its bid several times. On June 1st, 2021, IPL recommended a strategic combination with Pembina Pipeline Corp (“Pembina”) in a stock for stock transaction given an offer price of $19.45 per share ($8.3B deal; 0.5 exchange ratio of PPL for IPL), synergies of $150 to $200M resulting in PPL owning 72% of the combined entity and IPL owning 28%. In response, on June 2nd, BIP raised the offer from C$16.5 to $19.75 and on June 18th, revised the offer with an option for shareholders to elect 100% cash offer at $19.5 per share without probation and it also prepared to increase the offer by another $0.901 per share pending the outcome of the challenge before the Alberta Securities Commission (“ASC”). The hearing before the ASC on July 7th was to eliminate or reduce the amount of the $350M break fee. The expiry date of this offer was July 13th. On July 15th, BIP raised the offer a third time to C$21.23 per share with the option for investors to accept all cash, all stock, or a combination. The final offer price was 8% above Pembina proposal of $19.7 as of July 14th. On July 18th, Institutional Shareholder Services (“ISS”) favored BIP bid over Pembina deal and in response, on July 19th, BIP agreed with ISS and revised the offer a fourth time with minimal variation with respect to the third revision. With Pembina unwilling to match the bid, IPL board recommended the acceptance of the revised takeover offer on July 26th. This offer price was a 50% premium over the Feb 10, 2021, IPL share price of $13.4. The offer expires on August 6th, 2021, at 5 pm MST. BIP is expected to be the winner of the take over battle to take over the Canadian infrastructure company.
Sources: