It has been a great couple of days for Inter Pipeline (TSX:IPL) shareholders. On Thursday, the company’s stock price jumped almost 9% on rumors that it received a cash takeover bid worth up to $12.4 billion, or $30 per share.
The good news didn’t stop there. After the markets closed, Inter Pipeline announced strong second quarter results. The company posted record second-quarter income of $260 million, more than double analysts estimates for net income of $114 million.
Earnings of $0.63 per share is an 80% improvement over the $0.35 posted in 2018. Revenue of $642 million also topped estimates for $594 million.
Along with earnings, management announced it is exploring the sale of European bulk liquid storage business. Proceeds would be used to pay down debt and to finance its Heartland Petrochemical Complex.
This brings us full circle to the rumoured takeover. Inter Pipeline is a small-cap midstream company and Heartland is an ambitious $3.5 billion project. Heartland is a massive undertaking that has required significant financing. Although it is expected to provide a significant boost to fund flows once operational, the sheer size of the project is what has been weighing on the company’s share price.
News of an attempted takeover is not surprising. Heartland is an attractive project and Inter Pipeline is currently trading at cheap valuations. A larger player could easily swoop in, handle the project financing and it would be a relatively low-risk play for them.
Inter Pipeline has already sunk a great deal of capital into the project ($1.6 billion thus far) and took on almost a billion in financing earlier this year. The problem however, is that the company’s strategy to fund the project is taking its toll.
Its share count is rising due to its dividend reinvestment plan (a strategy used to save cash) and the company is highly leveraged.
The sharks are now circling as Inter Pipeline is nearing a decision – go all-in and take a go at building Heartland alone, take on a partner, or acknowledge that shareholders would receive greater benefit should they sell to a larger company that would be more able to handle project financing.
I suspect the news that it is looking at selling its European assets is a sign the company is committed to going at it alone.
Regardless of how this all plays out, it is not a bad thing for shareholders. Any takeover will most certainly come at a premium to today’s price and if not, the project is expected to generate $450-500 million in EBITDA yearly once it is fully operational in late 2021.
In the meantime, Inter Pipeline shareholders can sit back and relax knowing they will reap the benefits.
*Mat Litalien owns shares in Inter Pipeline.