MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING MONDAY, JANUARY 26, 1998 (3)
TOP STORY
The following are a list of news articles covering the NOVA & TCPL pipeline merger. The stories appear in sequence of listing.
Nova, TCPL Tying The Knot
$14-Billion Deal Is Largest Energy Merger Yet;
Nova's Petrochemical Division To Be Spun Off
Monday, January 26, 1998
Brent Jang Calgary Sun
In the biggest energy deal in Canadian history, Nova Corp. and TransCanada PipeLines Ltd. will announce today that they plan to merge in a $14-billion transaction, industry sources said yesterday.
Under the deal, TransCanada and Nova will combine their natural gas pipeline holdings in a "pooling of interests." Nova'spetrochemicals division will be spun off, said one source close to the negotiations, which were completed late Saturday.
J.E. (Ted) Newall, Nova's vice-chairman and chief executive officer, will reveal the merger plans in a joint announcement with George Watson, TransCanada's president and CEO, the sources said.
Mr. Watson likely will assume the reins of the merged pipeline assets. Mr. Newall is expected to be named chairman of the chemicals entity while Nova president Jeffrey Lipton could become CEO of that new unit.
The merger plan comes after much jockeying to lay pipe to feed the voracious appetite for natural gas in the United States, including a competing proposal launched by Alliance Pipeline Ltd. , whose partners include huge U.S. energy companies that are even bigger than Nova and TransCanada combined.
Nova is the dominant gas pipeline company in Alberta, while TransCanada is the only transporter of natural gas from western to central Canada. Both companies also have numerous international projects.
Nova and TransCanada each have a stock market value of roughly $7-billion.
Some cost savings are expected to come from cutting staff, although layoffs would be minimized as long as the merged company can expand aggressively. Nova has about 6,000 employees in total while TransCanada has more than 2,600workers.
Prices for many petrochemicals, which are used to produce various plastics, have been depressed for more than a year.
Nova's chemicals division, with a payroll of 3,400 workers, also owns 26 per cent of Vancouver-based methanol producer Methanex Corp. and 26 per cent of NGC Corp., a Houston-based natural gas marketer.
The Nova-TransCanada merger will be scrutinized by Canada's Competition Bureau. However, the political expertise of TransCanada senior vice-president Jake Epp, a former federal energy minister, should help overcome potential concerns about too much corporate concentration in the natural gas pipeline business, observers said.
The weekend's development means Nova will cancel its plans, released in November, to split up the conglomerate this spring and create two publicly traded entities: A new pipeline company and new petrochemicals firm.
However, an insider said the spirit of that proposal lives on -- investors will have pure plays that are each narrowly focused on one business specialty.
Institutional investors have complained in recent years that Nova suffered from a split personality: Its pipeline assets look attractive to conservative investors who want stability, but the company's petrochemical holdings appealed to speculative investors who thrive on volatile commodity prices.
"One of the reasons that Nova was looking at splitting itself was simply because investors wanted pure plays," the insider said.
The pipeline and chemicals divisions have roughly the same value now, but analysts say Nova's chemicals unit would be worth much more if commodity prices soared. By contrast, Canada's pipeline sector remains heavily regulated, although the grip of regulators is loosening.
Nova was founded in 1954 as Alberta Gas Trunk Line by the province's Social Credit administration led by then-premier Ernest Manning. Privatized in 1961, it grew from a small pipeline venture into a much larger entity and was renamed Nova in 1980.
TransCanada, a creation of the federal government in 1951, moved its head office to Calgary from Toronto in 1990. It has gone through various changes through the decades, including being controlled at one point in the 1980s by Dome Petroleum.
Nova shares closed at $14.85 on Friday, up $1 on the week, while TransCanada shares closed at $30.35, down $2.45 on the week.
The companies confirmed on Thursday that they had been holding merger talks, following rumours of a possible marriage of the two energy giants.
TransCanada, whose pipeline network connects to Nova's system at the Saskatchewan-Alberta boundary, has had a stranglehold on transporting western Canadian natural gas to central Canada for decades. TransCanada also exports huge volumes of gas to the United States.
But the emergence in late 1995 of a rival plan by Alliance Pipeline caught the two pipeline giants by surprise. Alliance hopes to win approval in mid-1998 from the National Energy Board to build a $3.7-billion pipeline from northeastern British Columbia to Chicago, seeking to open the line by late 1999.
In an interview before the Nova-TransCanada deal was reached, Alliance vice-president J.R. (Jack) Crawford said the established pipeline companies may be able clear a review by the Competition Bureau if the NEB approves Alliance's proposal.
"The irony of the situation is that Nova and TCPL might want us to exist in effect as a precursor to them being able to merge," Mr. Crawford said.
Talks between the two Calgary-based companies went smoothly in part because of good contacts at the board level: TransCanada chairman Gerald Maier is a long-time friend of Nova chairman Richard Haskayne.
Nova No Longer Alberta Inc.
Monday, January 26, 1998
By Mathew Ingram Calgary Sun
The rumours started circulating just before Christmas, and got stronger in early January -- TransCanada PipeLines was said to be putting together a plan to take over Nova Corp. Although some industry watchers scoffed at the idea, last week the two Calgary companies admitted they were discussing a merger that would create a $14-billion company, the largest business deal in oil patch history.
Any astonishment at the size of the proposed deal, of course, was soon extinguished by the announcement of the Royal Bank's proposed takeover of the Bank of Montreal, since the creation of an entity with $450-billion worth of assets makes the value of the TCPL-Nova deal look like a rounding error. But the overall principle behind the two deals is the same: You can't be too big when you're dealing with companies that are five times your size.
Sensible or not, there were a couple of reasons that even some seasoned industry players initially played down the rumours about TCPL and Nova. For one thing, takeover rumours in the oil patch are about as common as pickup trucks, but rarely as reliable. Then there was the sheer size and scale of the two companies, which seemed to argue against a deal.
But even more than that, there was probably a hesitation in believing such a thing was possible simply because of Nova's status in Alberta. This is not -- or at least was not -- just another company with a bunch of pipes and some chemical plants. This was Alberta Inc., a company conceived by premier Ernest Manning's government in 1954 and nurtured through various policies and regulations as a tool of regional and industrial development.
It's hard to believe that such an animal could be reduced to just another resource company, subject to just another takeover offer. And yet that is what has happened. In a fairly short time -- the blink of an eye, relatively speaking -- Nova has become just another company, no longer able to rely on (even as it chafed against) the safety and protection of the government.
The transformation has been a complex one, but one of the factors at the centre of it all has been the Alliance pipeline project. The $3.7-billion producer-backed pipeline to Chicago hasn't been the cause of all the changes, nor was it the only thing that led Nova to announce that it would split in two, which in turn threw the doors open to a takeover. But Alliance has definitely been the catalyst that crystallized Nova's fate.
The first step in Nova's transformation came four years ago, when the act that created Nova was repealed, and the company became governed by the normal corporate rules as everyone else. It was a step Nova itself had asked for, so it could make the changes it felt were necessary to get into other lines of business. Not long afterward, it started to get involved in international projects, a strategy that has begun to pay off.
And yet the old ways died hard, and nothing showed that more than Alliance, the first large-scale threat to Nova's traditional monopoly. A year-and-a-half ago, Nova started battling Alliance tooth and nail, portraying itself as the benevolent saviour of the natural gas industry, and Alliance as a short-sighted dash for cash on the part of some disgruntled producers.
At the same time, the conglomerate was making its case behind the scenes to various members of the Klein government -- in particular, defending the "postage stamp" tradition of pipeline pricing, which helped make high-cost production in the north more economically feasible by charging producers the same rate to ship their gas regardless of how far that gas had to travel. Industry insiders say it was clear Nova thought its pre-eminent position was totally secure, thanks to its long and cozy relationship with the province.
At some point, however, it became obvious that the government was not going to ride to Nova's rescue either on Alliance or the postage stamp. The Alberta Energy and Utilities Board stopped short of upholding the postage stamp in a pipeline ruling, and Energy Minister Pat Black said the industry was effectively on its own when it came to the issues posed by Alliance. For better or worse, the emotional apron strings had been cut.
It's worth noting that TransCanada -- whose virtual monopoly outside Alberta mirrors Nova's inside -- has also been shaken up by the Alliance proposal. After poo-poohing the idea, TCPL got moving too late and wound up coming up with a series of abortive proposals for competing projects. First there was a grand scheme called Nexus, all but scrapped later in favour of something called Viking Voyageur. A related line called TransVoyageur was launched, and later scrapped in favour of a more modest project.
Did Alliance cause all this turmoil, or did it just make the existing turmoil within these two monopolies more obvious? That's difficult to say. What is clear is that, for an idea that was jeeredat as a "pipe dream" when first proposed less than three years ago, Alliance has played a key part in a historic transformation of the Western Canadian natural gas industry, a transformation whose effects will be felt for years to come.
Nova And TCPL Unite As Equals
Claudia Cattaneo Financial Post
Post
After two months of discussions, Nova Corp. and TransCanada PipeLines Ltd. announced yesterday they're uniting as equals to form the fourth largest energy services company in North America, with assets of $21 billion and revenues of $16 billion.
The new company, which has not been named, will then spin off Nova's chemical unit into a freestanding, publicly traded company with assets of $3.9 billion, revenues of $3.4 billion - and big expansion plans.
"This is a deal made in heaven," said Nova vice-chairman Ted Newall. "These are two businesses that fit perfectly - 90% of their gas comes from us.
"They don't have any pipe in Alberta. We don't have any pipe outside. And we both want to grow in energy services."
Newall will be chairman of the new chemical company, while the chief executive will be Nova president Jeff Lipton.
"The North American energy services industry is experiencing a wave of consolidation as companies position themselves for success in an increasingly competitive market," said TCPL president and chief executive George Watson, who will be president and chief executive of the entity.
Under the agreement, Nova shareholders will get 0.52 of a TCPL share for each Nova share held. This values Nova stock at $15.75, slightly less than analysts expected. Each Nova preferred share will be exchanged for a preferred share in the merged company.
Nova shares (NVA/TSE) closed at $15.05, up 20›. TCPL shares (TRP/TSE) ended the day at $30.30, down 5›.
Shareholders of both firms will also get a piece of the chemical company, expected to start trading after the merger is cleared by shareholders, regulators and tax authorities.
Shares of the chemical company are expected to hit the market at about $7 a share - a combination of the current value of Nova's chemical assets ($4 to $5 a share), Nova's share in Methanex Corp. (valued at about $1 a share) and its stake in NGC Corp. (valued at about $2 a share), said Tom Kehoe, a principal with Peters & Co. Ltd.
"Nova's shareholders are getting a fair deal," he said. "I always thought the breakup value was $14.75. They are getting $15.75."
The new entity is expected to yield $100 million in pretax incremental earnings by 2002 through revenue growth and cost reductions of more than $150 million.
The initial annual dividend is expected to be $1.12 a common share, down from $1.24. TCPL plans to issue up to $250 million in new shares this year to help pay for the transaction.
Through a plan of arrangement that would have to receive court approval, the merger is expected to be finalized in the next four to six months. The Alberta Energy & Utilities Board and the federal Competition Bureau must approve the deal.
Watson said he approached Newall with the proposal almost right after Nova announced plans in November to split its two businesses - chemicals and pipelines - into two separate publicly traded companies.
"After the spinout, we believed somebody would take a run at it and so we acted proactively," Watson said. "We were concerned if they were bought by someone else we would lose control over our ability to control costs."
The job of selling the marriage started immediately. A meeting with the Canadian Association of Petroleum Producers was held yesterday afternoon. Watson said producers' first reaction was: "This is about the big and ugly getting bigger and uglier."
Producers will be looking for savings and assurances there is competition in access to markets, said CAPP president David Manning. They are also concerned about Nova's position against the proposed Alliance project, a $3.7-billion natural gas pipeline competing with the Nova/TCPL systems. The proposal is before the National Energy Board for approval.
Newall said producers have nothing to fear because competition is not diminished. In fact, lower costs will translate into lower transmission costs for producers and savings for consumers, he said. The combined companies are also promising to be more efficient and more responsive to producer needs.
Shares in Nova's chemical business, which will be one of the few pure plays in North America, will start trading during a downturn in commodity prices.
But the new unit expects to benefit from major savings next year and completion of new plants in Sarnia, Ont., and Joffre, Alta., said Lipton.
Lipton said he's already started discussions to take over operations of companies that want to spin off their commodity chemicals.
"The vision is to grow and to consolidate around our current nucleus, to be very low cost and attract others to work with us," he said.
Hundreds of people worked on the deal to ensure the union would yield enough savings and revenue enhancements to make it worthwhile, Watson said.
"There were so many people involved, that's why it was the worst kept secret in town."
Who Wins In Nova-TCPL Deal?
Tuesday, January 27, 1998
By Mathew Ingram
At a press conference yesterday announcing his company's $14-billion merger with TransCanada PipeLines, Nova CEO Ted Newall said several times how the deal was a "win-win" arrangement for all concerned, "a win for Canada," good for Western gas producers, and so on.
Even assuming all that is true, however, it's hard to see how it's all that great for the group Mr. Newall is supposed to be concerned about -- Nova's shareholders.
As the deal is structured, TransCanada and Nova will merge into a combined entity on what's known as a "pooling of interests" basis. This is being done to avoid various negative accounting implications that would arise if TCPL took over Nova. Apart from the finagling over share swap details that is required by this method, there is one main outcome: Nova shareholders do not get any premium for their stock.
This isn't just a coincidental byproduct of the pooling of interests method but a central requirement. If TransCanada were to pay Nova a takeover premium -- in other words, pay more for its assets than their market value -- then TCPL would have to take all kinds of writeoffs for that difference in asset value, known as "good will." TransCanada couldn't really afford to do that, so the deal is being structured so that there is no premium.
In effect, this deprives Nova shareholders of the kind of share price appreciation they might otherwise expect. When the gas pipeline and chemical conglomerate announced in November that it was planning to split in two, there was a considerable amount of speculation about the future of the two new companies. Most observers thought there was a good chance that there would be takeover offers for both of them.
TransCanada CEO George Watson obviously thought so. He said yesterday that he called Mr. Newall at about 8 a.m. on the morning the company announced its intention to split to talk about a deal. Mr. Newall, for his part, said Nova executives were fairly sure that takeover discussions would result from the decision to split, but said TCPL was not first on the list. There were a couple of other companies Nova had in mind first when it came to having those kinds of discussions, he said, although he wouldn't name them.
If there had been an auction of some kind for Nova's pipeline system, investors might have received a substantial premium to their existing value. In a recent report, Scotia Capital analyst Sam Kanes said he felt Nova was worth about $18.30 a share with takeover premiums for both pipelines and chemicals built in. The proposed merger with TCPL deprives Nova shareholders of a substantial part of that potential.
And what upside there is will be a considerable way down the road. Mr. Watson said that as a "major stockholder" himself, he obviously thinks the deal is worth it in the long run, although he admitted it will have no impact on earnings for at least the first year.
But he said it likely will have a positive effect the year after that and should result in $100-million worth of pretax earnings by 2002. Both of these, however, are assumptions that shareholders will have to take on faith.
In the short term, the deal already has fallen in value. TCPL is offering 52 per cent of a TCPL share for every share of Nova -- a ratio that last week would have meant $17.16 a Nova share, since TransCanada's stock was trading at $33. As of yesterday, however, the deal would amount to $15.75 a Nova share, since TCPL's stock had fallen to $30.30. Part of the reason for the drop is that it will be issuing 240 million new shares under the deal, diluting the value of its existing 221 million shares.
There is some potential upside for Nova investors. Under the current plan, the chemical unit will be spun off as a separate company, the shares of which will be distributed to Nova and TCPL shareholders. Assuming it attracts takeover offers, something analysts feel is fairly likely, there is the potential for some kind of takeover premium there -- although not a large one since chemical prices are weak and expected to continue to weaken.
One other interesting aspect of the announcement yesterday was the difference between the way Mr. Watson and Mr. Newall spoke about the Alliance pipeline project, currently before the National Energy Board. Mr. Watson said the $3.7-billion pipeline to Chicago was "pretty well inevitable" and he felt TCPL should be prepared for competition.
Mr. Newall, however, said the merger had no effect whatsoever on his company's position on Alliance, which is that it would be bad for the Western Canadian basin.
If you're a betting sort of person, the odds here favour Mr. Watson. The combination of two large quasi-monopolies, such as Nova and TCPL, will make Alliance even more likely to be approved than it already was. Flashing a hint of his steely nature, Mr. Watson said that, while his opinion and Nova's differ on Alliance, "at the end of the day, there there will be one position."
Mr. Watson, incidentally, will be CEO of the merged pipeline company.
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