Canada’s Pembina Pipeline Corp. agreed to buy smaller rival Kinder Morgan Canada and the U.S. portion of the Cochin pipeline for C$4.35 billion, bulking up its storage resources in Canada, Reuters reported.
Producers in Canada’s Alberta oilfields are storing more oil locally due to a shortage of transport options and the Cochin pipeline currently carries U.S. condensate into the region to dilute the heavy crude it produces.
Years of delay in building new pipelines has led to oil production outpacing takeaway capacity and pushed up demand for storage tanks in the Canadian industry.
The deal also follows an unsolicited bid for Inter Pipeline Ltd (IPL.TO), highlighting growing interest in the “midstream” business in transporting and storing crude in an otherwise slow energy M&A market.
Kinder Morgan’s Cochin pipeline system traverses three provinces in Canada and seven states in the United States and is one of two pipelines that import condensate from the United States.
Pembina, which owns a range of gas and oil pipelines, storage and processing plants in western Canada, will also buy the Edmonton storage and terminal business as well as the bulk storage business Vancouver Wharves, as part of the deal.
Pembina will pay C$2.3 billion ($1.73 billion) for Kinder Morgan Canada and C$2.05 billion for the U.S. portion of the Cochin pipeline system from U.S.-based Kinder Morgan Inc (KMI.N).
“This is the transaction the market wanted earlier this year,” Brokerage Credit Suisse said, adding that valuation was in line with its original expectations and that the deal would likely be well received.
Shares in Kinder Morgan Inc rose around 2.5% in trading before the bell. Kinder Morgan Canada’s shares were up 34%, while those of Pembina were down about 0.8%.
Kinder Morgan Canada had earlier explored options, including a sale, but in May decided to continue as a stand-alone entity. The company said it got Pembina’s proposal about two months after the review was concluded.
Shareholders of Kinder Morgan Canada will receive about 0.3068 shares of Pembina for each of its own share, valuing Kinder Morgan Canada at C$15.12 per share based on Tuesday’s closes.
Kinder Morgan Inc will get about 25 million shares, or slightly less than 5%, of Pembina, which they eventually plan to convert to cash.
Pembina expects the cash consideration for the Cochin US deal to be initially funded from debt and expects to raise its monthly dividend rate by 5% or $0.01 per share, after the deal closes.
TD Securities acted as exclusive financial adviser to Pembina, while J.P. Morgan served as financial adviser to Kinder Morgan Canada. BMO Capital Markets were the financial adviser to Kinder Morgan Canada’s special committee.
Reporting by Shanti S Nair in Bengaluru; Writing by Arathy S Nair, editing by Shinjini Ganguli and Patrick Graham
