Could TransCanada Corporation Shares Rise to $75?

One investor has some ideas about how to make TransCanada Corporation (TSX:TRP)(NYSE:TRP) stock soar.

| More on:
The Motley Fool

After weeks of rumours, TransCanada Corporation (TSX: TRP)(NYSE: TRP) is being targeted by activist investors from the United States. In a letter released today, Sandell Asset Management (based in New York City), claimed that TransCanada would be worth $75 per share if it were broken up, well above the $56 opening price today. As a result, the pipeline company’s shares are up over 2% (as of this writing), just a couple days before its analyst conference in Toronto.

So would a breakup really allow TransCanada stock to trade $20 higher? Below we take a look at the possibility.

The breakup

According to Thomas Sandell, TransCanada can maximize value by doing two things. First, the company can spin off its energy assets. There’s a strong argument for this. TransCanada’s energy segment, as it stands, “obscures stable pipeline cash flows”, as put by Mr. Sandell. And once spun out, the newly formed energy company could target investors and analysts “who best understand power generation risks.” This should allow the energy company to trade at a much higher valuation than TransCanada currently does.

Step two is even more significant: Mr. Sandell wants TransCanada to “fully employ its MLP immediately to catch up with its major North American infrastructure competitors who have already benefited for years.” In other words, Mr. Sandell wants TransCanada to transfer its U.S.-based assets into a tax-efficient master-limited partnership. TransCanada has already been doing this, but at a pace much too slow for Mr. Sandell.

Again, there’s a strong argument for making such a move. Some of the comparable partnerships trade at more than 30 times EBITDA (earnings before interest, tax, depreciation, and amortization), a big premium to TransCanada’s valuation.

Will this happen?

First, the bad news. U.S. activist investors have targeted Canadian companies before, and rarely get a welcoming response. Just look at Canadian Pacific, Agrium, or Telus. At a certain point, one has to wonder if national pride plays a role. Making matters worse, Sandell Asset Management holds a very small stake in TransCanada – only $36 million. So if the company ignores Mr. Sandell, it’s hard to imagine him putting up much of a fight.

But there is some good news. As mentioned, TransCanada has already been using its MLP in the United States, so Mr. Sandell simply wants the company to do more of the same thing. That’s not too far-fetched at this point.

So should you buy TransCanada shares?

There’s a strong case to be made for TransCanada stock. The company already has a dividend yield of 3.4%, even after the increase in today’s share price. This dividend is also much safer than most of the company’s peers in the energy sector.

So with Mr. Sandell’s suggestions, there’s that much more upside.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned. Agrium is a recommendation of Stock Advisor Canada.

More on Energy Stocks

oil and gas pipeline
Energy Stocks

Where Will Enbridge Stock Be in 3 Years?

Despite its recent sharp gains, Enbridge (TSX:ENB) stock has the potential to continue inching up in the years to come…

Read more »

Nuclear power station cooling tower
Energy Stocks

Is Cameco Stock the Best Renewable Energy Stock for You?

While it's true that Cameco stock (TSX:CCO) looks like a strong clean energy solution, it's not actually even a renewable…

Read more »

Target. Stand out from the crowd
Energy Stocks

Here’s Why I Think Brookfield Renewable Stock Is 1 of the Best Deals on the TSX Today

Brookfield Renewable (TSX:BEP.UN) stock saw shares rise by about 35% since earnings, but even more is on the way.

Read more »

oil and natural gas
Energy Stocks

How Baytex Energy Lost 12% Last Month

Baytex Energy (TSX:BTE) stock fell 12% last month.

Read more »

bulb idea thinking
Energy Stocks

This Stock Is Miles Ahead of Its Industry: Is It a Buy Now?

This stock has proven to be well worth the investment, especially at a time with increasing demand for clean energy…

Read more »

Oil pumps against sunset
Energy Stocks

Is Suncor Energy Stock a Buy in 2024? 

Let's dive into whether Suncor Energy (TSX:SU) is a stock that's worth buying in this current environment or if investors…

Read more »

oil tank at night
Energy Stocks

Is CNQ a Buy Before its Upcoming Stock Split?

CNQ stock is a high-dividend TSX energy giant with a growing dividend yield. Is CNQ stock a good buy right…

Read more »

Solar panels and windmills
Energy Stocks

How Brookfield Renewable Stock Gained 40% in a Month

Brookfield Renewable stock (TSX:BEP.UN) surged in share price from a landmark deal and strong earnings, leading to a 40% jump.

Read more »