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Enbridge to Buy Spectra Energy Partner's Outstanding Units

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Enbridge Inc. (ENB - Free Report) and Spectra Energy Partners have inked a deal, per which the former will acquire all of the outstanding public common units. Enbridge already owns 83% of the master limited partnership (MLP).

Terms of the Deal

Per the deal, Enbridge will pay 1.111 common shares for each of Spectra Energy Partners’ outstanding unit. On May 17, 2018, Enbridge had agreed to give out its 1.0123 common shares for every common unit of Spectra Energy Partners. The current agreed exchange ratio signifies a 9.8% increase from the previous one. Per the closing price of Enbridge's common shares on the New York Stock Exchange (NYSE) on Aug 23, 2018, the transaction is valued at $3.3 billion (CAN $4.3 billion).

Based on the Agreed Exchange Ratio, Enbridge will issue an estimated 91.0 million common shares related to the transaction, equivalent to about 5% of the total number of its outstanding common shares.The transaction is anticipated to close in the fourth quarter of 2018.

If the transaction is not closedbefore the record date of Spectra Energy Partners’ fourth-quarter 2018 distribution, Spectra Energy Partners is expected to pay a cash distribution to unitholders in the fourth quarter as disclosed in the earlier distribution guidance. Based on the closing date for the transaction during the fourth quarter, unitholders will either receive a Spectra Energy Partners cash distribution or an Enbridge cash dividend.

Benefits to Enbridge’s Shareholders

The transaction is in sync with Enbridge’s strategy to abridge and restructure corporate structure which further enhances the transparency of strong cash generating assets. The move is aimed to streamline operations amid the U.S. tax changes. Units of MLPs declined due to the regulators’ decision to prevent the partnerships from a key tax benefit. This also made it difficult to raise funds for growth projects. As a result, many MLP’s including Williams Partners L.P. and Energy Transfer Partners LP are shifting from the MLP model — a structure often used to own pipelines transporting oil and natural gas.

Enbridge's three-year financial guidance through 2020 will not be affected.However, post-2020 Enbridge’s outlook will be positively impacted by tax and other financial synergies.

Enbridge’s consolidated EBITDA will not be impacted postthe merger as the assets held by Spectra Energy Partners are already managed and operated by Enbridge's U.S. subsidiaries and consolidated for accounting purposes by the company.

Benefits to Spectra Energy Partners’ Unitholders

The unitholders of Spectra Energy Partners will have direct ownership in one of the leading energy infrastructure company that is capable of generating consistent cash flows. Enbridge also supports a stronger balance sheet and expects 10% annual dividend growth through 2020 with improved dividend coverage.

The transaction offers significant premium, considering Spectra Energy Partners’ limited future capacity for distribution growth. Also, for theunitholders, the value received eradicates uncertainty created by FERC policy announcements.

Price Performance

Enbridge has underperformed the industry in the past year. The company’s shares have lost 10.9% compared with the industry's 5.2% decline.


Zacks Rank

Enbridge currently carries a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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