Voting For Or Against The EEP/EEQ/ENB Merger

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About: Enbridge Energy Partners L.P. (EEP), Includes: EEQ, ENB
by: Robert Auers
Summary

Enbridge has offered 0.335 shares of ENB for each outstanding unit/share of EEP/EEQ.

Shareholders must decide whether not to approve the merger by 12/16/18.

Enbridge is significantly undervaluing EEP/EEQ and holders of the common of these two entities would be better off voting against the merger.

Enbridge Energy Partners principal assets are the Lakehead system (which primarily moves Canadian crude through the US Midwest) and its Bakken system (including its JV interest in DAPL/ETCOP). All of these assets are long-haul crude pipelines that are either backed by long-term take-or-pay contracts or are common carrier pipelines with no significant competition that routinely and predictably stay full and are able to charge the maximum allowable FERC tariff. Assets such as these have recently be valued at about 13x-14x EBITDA in the open market due to their ability to reliably generate stable cash flows with little risk. A great of example of this is the PAA/MMP sale of a 50% interest in the Bridgetex Pipeline (running from the Permian Basin to Houston) to OMERS (defined benefit pension plan for municipal employees in Ontario) for $1.44 Billion. Morningstar and other analysts estimated that this sale occurred at an ~13.5x EBITDA multiple. Bridgetex, while in a different region of the country and serving a different producing basin, represents a very similar asset to Enbridge Energy Partner’s crude pipelines and I believe this transaction appropriately characterizes the value of Enbridge Energy Partner’s assets in the open market.

Nonetheless, Enbridge is offering to buy Enbridge Energy Partners out at a price that represents less than 9x 2018 EBITDA (!), assuming 2018 EBITDA comes in around $1.64 billion (First nine months EBITDA came in at $1.215 billion). Enbridge Energy Partner’s existing capital structure is made up of about $8 billion in debt and $6.5 billion in equity at current prices. Moreover, the current market price of EEP and EEQ equity appropriately represents the merger offer of 0.335 shares of Enbridge for each unit/share of EEP/EEQ. As a result, if unit/share holders of EEP/EEQ were to vote down the proposed merger, they could reasonably expect the total enterprise value (market value of debt + equity) of Enbridge Energy Partners to reach $22 Billion, up from its current ~$14.5 Billion, based on a 13.5x EBITDA multiple. While some of this benefit would accrue to the GP (Enbridge) the majority would accrue to the common equity, and one could reasonably expect the EEP unit price to double over the next year, even with minimal EBITDA growth, simply by the multiple re-rating closer to fair market value.

As a result, EEP and EEQ holder would be best suited to vote down the proposed merger as it significantly undervalues Enbridge Energy Partners high quality, stable, cash-generating assets.

Disclosure: I am/we are long EEQ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.