Inter Pipeline (TSX:IPL) has become an attractive acquisition target for Pembina Pipeline (TSX: PPL)(NYSE: PBA) and Brookfield Infrastructure Partners (BIP.UN)(NYSE: BIP). This renewed interest has pushed Inter Pipeline stock up 4.13% this week. But the biggest gain came today as Brookfield upped its full-cash offer to $8.58 billion from $8.48 billion. In per-share terms, it is $20 as compared to the previous offer of $19.5.
This increased interest comes as oil futures surge over the anticipation of a recovery in travel demand. Now, what does this mean to you as an investor? How can you profit from it? Let’s take one thing at a time.
So what does the proposed acquisition mean to you?
Brookfield has been planning a hostile takeover of Inter Pipeline for a long time. Before it made its first hostile bid in February, it acquired about 9.8% of Inter Pipeline’s shares so that it doesn’t have to disclose its purchase. The rule says that you have to disclose your holdings if you own a 10% stake.
Then Brookfield purchased swaps to increase its stake in Inter Pipeline to around 20%, which again doesn’t need any disclosure. This misuse of financial instruments forced Alberta regulators to add a hurdle for Brookfield. Instead of 50%, Brookfield has to get investors to tender at least 55% of Inter Pipeline’s shares to complete the acquisition. But that didn’t stop Brookfield, and it increased its all-cash offer to $20.
Amid all this, Pembina made an all-stock offer for Inter Pipeline in June. Pembina has offered IPL shareholders a 175% increase in the monthly dividend. At present, IPL and Pembina offer annual dividends per share of $0.48 and $2.52, respectively.
Pembina plans to fund the 175% dividend growth from the acquisition synergies and accelerated growth from rising oil prices. The oil prices dipped significantly during the pandemic and have surged more than 80% since November 2020. The oil prices have surged to their 2018 high and can rise further.
Between Pembina and Brookfield, I believe Pembina’s offer is more lucrative. Investors generally buy pipeline and infrastructure stocks for dividends and not capital appreciation. Brookfield doesn’t pay dividends and what it is offering is one-time cash.
Pembina has a rich history of paying monthly dividends since 1998 and has also been increasing dividends for the last 10 years. Rest you are a better judge of what you want, a lifetime dividend or one-time cash.
How can you profit from growing interest in pipelines
The IPL, Pembina, and Brookfield trilogy has unveiled the growing interest in pipelines. It is becoming increasingly difficult to build major pipelines due to growing environmental awareness.
Just last month, TC Energy terminated its major Keystone XL Pipeline project after U.S. President Joe Biden rejected it. This has made the existing pipelines more valuable. If you look at the long-term picture, the more valuable these pipelines become, the higher the toll rate they can charge.
When something is limited, the game of consolidation begins as that is the only way you can expand in the same area. IPL has oil and gas pipeline infrastructure in Western Canada and liquid storage facilities in Europe, and processing plants in Alberta.
I am not saying TC Energy will become an acquisition target, but it might acquire other companies. The result is cost synergies, bonus dividends, and capital appreciation. Think about it.
I am bullish on pipelines, and if you are too, Enbridge and TC Energy are a bargain.
