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Activist pipeline

19 November 2014 By Kevin Allison

A sparring match with an activist is a bigger deal for TransCanada than the company’s troubled Keystone XL pipeline. The proposed $8 billion conduit of tar-sands oil from Alberta to Texas failed to muster enough votes in the U.S. Senate on Tuesday night. But even if the long-delayed project dies, the lost value could pale next to the extra lucre a New York hedge fund thinks shareholders would reap from a breakup of the $35 billion company.

Sandell Asset Management thinks the Canadian pipeline operator could be worth about a third more if it spun off its non-core power generation business and made better use of a tax-advantaged U.S. subsidiary. Sandell argues there are no obvious synergies from owning both petroleum pipelines and power plants. Additionally, it says TC Pipelines, a U.S. master limited partnership controlled by TransCanada, isn’t being used to its full potential.

TransCanada calls the activist’s analysis “flawed.” It wants to stick to a more conservative approach as it tries to fund $46 billion of pipeline projects. But Canada’s activist-friendly laws and big investors’ recent embrace of uppity shareholders means management can’t rest easy.

It is cheaper and easier to launch a proxy fight in Canada, where an investor with just a 5 percent stake can call a shareholder meeting. And just as big pension funds are doing across the border, some big Canadian investors are increasingly supportive of activists. The Ontario Teachers’ Pension Plan, for instance, backed Pershing Square’s successful attempt to unseat railway operator Canadian Pacific’s board in 2012.

Sandell holds a tiny stake in TransCanada. But its sum-of-the-parts analysis, based on peer multiples, suggests the company would be worth $75 per share in a breakup – a 34 percent premium. American rival Spectra Energy has outperformed both the S&P 500 Energy Index and TransCanada since Sandell pressured it to move more assets into its pipeline MLP last year.

During an investor day on Wednesday, TransCanada said it expected dividends to grow more quickly starting next year. Chief Executive Russ Girling’s decision to stick to his guns suggests he is confident he has the support of his shareholders. But as the Keystone pipeline’s roller-coaster ride in Congress shows, that, too, may be fleeting.


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