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 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 noncore power generation business and made better use of a United States subsidiary’s tax advantages.
Sandell argues there are no obvious synergies from owning both petroleum pipelines and power plants. Additionally, it says TC Pipelines, an American 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 start 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 the successful attempt by the hedge fund Pershing Square Capital Management 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 a share in a breakup – a 34 percent premium. An American rival, Spectra Energy, has outperformed both the Standard & Poor’s 500 Energy Index, and TransCanada since Sandell pressured it to move more assets into its pipeline master limited partnership last year.
During an investor day on Wednesday, TransCanada said it expected dividends to grow more quickly starting next year. Its chief executive, Russ Girling, has decided to stick to his guns, suggesting he is confident that he has the support of his shareholders. But as the Keystone pipeline’s roller-coaster ride in Congress shows, that, too, may be fleeting.
Senate Defeats Bill on Keystone XL Pipeline in Narrow Vote
Senator Mary L. Landrieu, Democrat of Louisiana, had hoped to get the legislation through in advance of her uphill runoff election fight back home.
Kevin Allison is a columnist at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.