Morningstar | Spectra Energy Partners Gets a Boost From Enbridge; Raising FVE
We are raising our fair value estimate for Spectra Energy Partners to $54 per unit from $49 after Enbridge announced that it was raising its proposed exchange ratio to acquire the 17% stake in Spectra that it does not already own.The new offer gives Spectra unitholders 1.111 shares of Enbridge for every Spectra unit, a 9.8% increase from Enbridge's previous share exchange offer in May. We continue to believe the companies will close the deal by year-end. Our new fair value estimate is based on the new exchange ratio and our $49 per share value for Enbridge.
We think Spectra unitholders should be happy with this new offer. Enbridge's new offer gives Spectra unitholders a premium to our pre-deal fair value estimate, unlike the initial offer. The initial exchange ratio was in line with what we considered fair based on our relative pre-deal fair value estimates for the two companies, effectively offering no premium. Enbridge's initial offer also appeared low based on the companies' historical relative prices. Given Enbridge's 83% ownership, common unitholders appeared to have no power to derail the deal or demand a higher value.
The new exchange ratio values Spectra at 13 times its 2018 distribution, up from 11 times with the initial offer but still lower than 15 times Enbridge paid for Spectra's incentive distribution rights in February.
The market seemed to be anticipating Enbridge's move given Spectra units had been trading slightly above the implied takeout value based on the original exchange ratio.
Enbridge's new offer comes as Spectra continues to perform well and fears about earnings and distribution cuts related to Federal Energy Regulatory Commission policy changes have subsided. Spectra raised its second-quarter distribution 7% and we expect a similar increase this quarter if the deal doesn't close before the distribution date.
Spectra Energy Partners is a partnership holding company. Through its subsidiaries and equity affiliates, the company is engaged in the transmission, storage and gathering of natural gas, and the transportation and storage of crude oil, through interstate pipeline systems in the U.S. and Canada. The company's operations and activities are managed by its general partner, Spectra Energy Partners (DE) GP, LP. The company manages its business in two reportable segments: U.S. Transmission, which provides transmission, storage, and gathering of natural gas in northeastern and southeastern U.S.; and Liquids, which provides transportation and storage of crude oil in central U.S. and Canada.
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