Enbridge Inc (USA) (NYSE:ENB) and Spectra Energy Corp. (NYSE:SE) have agreed to combine to create one giant energy infrastructure company. Price negotiation power and desire to protect or grow dividends appear to underpin the deal. But do you know everything about Project Rainbow?
It is Enbridge Inc (USA) (NYSE:ENB) that will be swallowing Spectra. In that case, Enbridge has agreed to pay $40.33 for each share of Spectra, which indicates a premium of nearly 11.5% over the closing price of Spectra stock on the last trading day before the buyout deal was made public. In total, the offer values Spectra at $28 billion.
It’s an all-stock transaction
Enbridge and Spectra have agreed to an all-stock transaction in a deal that has been codenamed Project Rainbow.
Though Enbridge and Spectra only recently announced their agreement to merge, the CEOs of the two companies have been in potential talks for months. If all goes according to plan, the companies hope to close the deal in 1Q2017.
The proposed merger of Enbridge and Spectra comes amid tough operating conditions for energy companies. Subdued oil prices and heightened regulatory environment has taken the shine off of many energy stocks.
Boosting scale for negotiation power
The resulting company from the combination of Enbridge Inc (USA) (NYSE:ENB) and Spectra is set to have a massive scale in pipeline business that should be beneficial in negotiating for favorable prices with customers. Recent years have seen Enbridge expand its cross-border pipeline capacity, thus helping Canada to hit record exports into the U.S.
Enbridge is also the owner of some of the largest oil storage facilities in Cushing, Okla.
Spectra is set to add to Enbridge’s pipeline capacity given its network of pipeline serving the East and Gulf Coasts.
Protecting dividends – Enbridge Inc (USA) (NYSE:ENB)
The combination of Enbridge Inc (USA) (NYSE:ENB) and Spectra also appears to be inspired by the desire to boost or protect dividends. There will be opportunities to save on costs and those savings can be used to bulk up dividend payouts. Additionally, the scale of the combined corporation should provide it with greater negotiation power that can result in higher margins, which in turn boost free cash flow and dividends.
The companies said that their shareholders can expect annual dividend growth of between 10% and 12% through 2024 if the deal succeeds. Before the deal, Spectra was promising its shareholders annual dividend growth of between 7% and 8%.
Enbridge Inc (USA) (NYSE:ENB)’s CEO, Al Monaco, will lead the combined company as president and CEO.