Will the Enbridge Inc. and Spectra Energy Corp. Merger Succeed?

Enbridge Inc. (TSX:ENB)(NYSE:ENB) and Spectra Energy Corp. (NYSE:SE) are creating a $130 billion behemoth. Will it work?

| More on:
The Motley Fool

On September 6 Enbridge Inc. (TSX:ENB)(NYSE:ENB) disclosed that it would buy Spectra Energy Corp. (NYSE:SE) for $37 billion (US$28 billion). The takeover will combine two Canadian and American behemoths, creating North America’s largest energy infrastructure company. In total, the new company will have an enterprise value of nearly $130 billion.

Spectra shares jumped 13%, while Enbridge popped roughly 4%.

No cash will be exchanged because it’s an all-stock deal. Enbridge will issue about 694 million new shares and take on about $22 billion of Spectra debt.

What should you think about the move?

This is not a low-risk deal

“Over the last two years, we’ve been focused on identifying opportunities that would extend and diversify our asset base and sources of growth beyond 2019,” commented Enbridge CEO Al Monaco. The transaction “allows us to extend our anticipated 10-12% annual dividend growth through 2024,” he added.

Meeting investors’ expectations for growth has been weighing on Enbridge. Production growth in Canada’s oil sands–long expected to drive long-term earnings growth–has flattened or even fallen due to high production costs and falling oil prices. It’s also getting some regulatory pushback on an oil pipeline taking oil sands production in Alberta to Canada’s east coast. To meet its growth targets, management was forced to grow inorganically.

How Spectra will help it do that is unclear. Spectra’s pipeline, storage, and processing operations extend from gas fields in northern British Columbia through the U.S. Midwest and to the Gulf of Mexico. Compared to Enbridge, these operations haven’t performed that well. Over the last decade, Enbridge has consistently shown an ability to outpace Spectra’s growth. Adding Spectra’s business to its mix will likely slow overall earnings growth.

generate_fund_chart

But management is banking on investors looking at raw earnings-per-share growth rather than increases in shareholder value. Note that CEO Al Monaco cited “10-12% annual dividend growth through 2024” as one of the driving factors behind the deal–not necessarily improving overall shareholder profits.

A great example of this can be seen by tracking earnings per share over time. While the company has expanded aggressively, boosting sales and assets, shareholders have been continually diluted, leaving them with a lower share of earnings than back in 2010. Still, management has forged on with their double-digit annual-dividend-increase promise. Dividends have outpaced earnings in every quarter but one since 2012.

2

Spectra shareholders are the winners

There’s a reason why Spectra was up three times more than Enbridge on the day the deal was announced. Spectra shareholders will be the winners of the transaction because they’ll be bought out at a premium. Enbridge shareholders, meanwhile, will be stuck with an ever-growing business that isn’t necessarily growing shareholder value. They’ll likely be pleased with another dividend bump next year, but don’t be fooled into thinking it’s sustainable.

If you’re looking at buying the newly combined company, stay far away.

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 Ryan Vanzo has no position in any stocks mentioned. The Motley Fool owns shares of Spectra Energy. Spectra Energy is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »

sale discount best price
Dividend Stocks

1 Dividend Stock Down 11 Percent to Buy Right Now

Do you want a great dividend stock down 11% that can provide years of growth potential? Here's one heavily discounted…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Are you looking for dividend stocks to buy right now? Here are two top picks!

Read more »

edit Taxes CRA
Dividend Stocks

Tax Time: How to Keep More of Your Money

Nearly everyone hates paying taxes, although Canadians can lessen the financial pain with the right tax strategies.

Read more »