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TransCanada to buy Columbia Pipeline Group for US$10.2b

[CALGARY] TransCanada Corp agreed to buy Columbia Pipeline Group Inc for US$10.2 billion, expanding its reach in the US natural gas market.

TransCanada will pay US$25.50 a share to Columbia holders, representing a 10.9 per cent premium to Columbia's closing price on March 16, and will also assume about US$2.8 billion of debt, it said in a statementon Thursday.

The Calgary-based company will fund the purchase with proceeds from asset sales and a C$4.2 billion (S$4.32 billion) offering of new shares.

The deal gives TransCanada more than 24,000km of natural gas pipelines as well as underground storage and processing facilities owned and operated by Columbia, adding a position in the Marcellus and Utica shale regions.

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TransCanada may augment its annual dividend growth rate of eight to 10 per cent per year with the deal, the company said.

"It's very complementary to what they already have," Skip Aylesworth, who manages about US$1.5 billion in Boston including the Hennessy Gas Utility Fund, said on Thursday by phone.

Hennessy holds shares of both TransCanada and Columbia. "They have an east-west superhighway in Canada. This gives them a north-south superhighway." Potential Reversal TransCanada already gets the bulk of its revenue, 48 percent in 2015, from gas shipping. Including its Mainline pipeline system that crosses Canada, the company fully owns 35,200 miles of gas lines and has stakes in another 6,700 miles, supplying about 20 per cent of North America's heating and power- plant fuel, according to its website. It's also one of the continent's biggest providers of gas storage, with 368 billion cubic feet of capacity.

TransCanada has been seeking to grow its presence in the US gas market as production rises from Appalachia fields. Vast supplies of cheap gas from the Marcellus and Utica shale plays are pushing western Canadian volumes out of their traditional markets, as US producers seek new buyers for their fuel north of the border.

TransCanada, in turn, has been soliciting commercial support for the potential reversal of its Iroquois pipeline, which has been sending western Canadian gas supplies to the Eastern US for more than two decades.

'RARE OPPORTUNITY'

"The acquisition represents a rare opportunity to invest in an extensive, competitively-positioned, growing network of regulated natural gas pipeline and storage assets in the Marcellus and Utica shale gas regions," said Russ Girling, TransCanada's president and chief executive officer, in the statement.

The company has had its eye specifically on getting a pipeline into the Marcellus, which stretches across Pennsylvania and parts of New York, Ohio and West Virginia. Girling said last November that the company may consider an acquisition to grow its Marcellus business, and that it's cheaper for existing players to build capacity.

The acquisition adds to TransCanada's US deals in the power and utility space, including the US$657 million purchase completed last month of a Pennsylvania power plant from Talen Energy Corp. The offer price represents a 29 per cent premium to Columbia's shares on March 9, the day before reports that the companies were in discussions about a deal.

ASSET SALES

TransCanada said its planned sale of power assets in the US Northeast, along with its sale of a minority interest in its Mexican gas pipeline business, will add to proceeds from the equity offering to pay for its purchase of Columbia.

The offering of 92 million subscription receipts at C$45.75 apiece represents a 5 per cent discount to the company's closing share price of C$48.15 on Wednesday. Royal Bank of Canada and Toronto- Dominion Bank are the underwriters.

The takeover also comes amid heightened merger and acquisition activity in the US pipeline space in recent years.

The US$58 billion purchase by Energy Transfer Equity LP of Williams Cos, announced last September, is the largest in the last decade and part of US$127 billion of US pipeline deals announced in 2015, according to data compiled by Bloomberg. Deals worth at least US$2.3 billion in the sector have been announced in 2016.

The spin off of Columbia Pipeline Group by NiSource Inc was last year's biggest in the US energy sector. Valued at almost US$12 billion, it ranked fourth behind EBay Inc's spinoff of Pay Pal Holdings Inc, the HP Inc separation of its enterprise unit and Baxter Internal's spinoff of a pharmaceutical unit.

GROWTH CONCERNS

TransCanada's purchase of Columbia may ease investor concerns over TransCanada's ability to grow over the long term, given that its large pipeline projects have been delayed or blocked.

TransCanada has lately been focusing on small- to medium-sized projects to support its annual dividend growth rate of up to 10 per cent as it struggles to win political support for big oil pipelines including Keystone XL and Energy East.

TransCanada in January opened one of the largest trade appeals ever brought against the US, seeking to recoup US$15 billion of costs and damages tied to the Obama administration's rejection of the Keystone XL oil pipeline. The company also sued the US government over the denial of the US$8 billion cross- border project.

TransCanada's exclusive financial adviser was Wells Fargo & Co, while Columbia's advisers were Goldman Sachs & Co, and Lazard Ltd. TransCanada's legal advisers were Mayer Brown LLP, Blake, Cassels & Graydon LLP and Osler, Hoskin & Harcourt LLP. Columbia's legal counsel was Sullivan & Cromwell LLP.

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