Scalper1 News
Summary Sandell Asset Management has moved up from activist campaigns in the restaurant space to the oil & gas pipeline space. Founder Thomas Sandell is pushing TRP to break itself up and utilize its MLP more. TRP is pushing back, given it might not benefit its Canadian shareholders. But with a below-average dividend yield and the Keystone XL overhang, something needs to be done. Sandell Asset Management is known for its heated battle with Bob Evans (NASDAQ: BOBE ), with its founder, Thomas Sandell, pushing for a split of Bob Evans’ restaurant and processed food business. “One of Sandell’s keys is to get Bob Evans to sell or spin-off the segment that produces products, such as sausages and mashed potatoes for sale in supermarkets. That’s because there are little synergies between that business and the restaurants it operates.” – Marshall Hargrave Well, he’s pushing the “split-up” thesis at another company, one that is quite the opposite. Sandell wants TransCanada (NYSE: TRP ) to spin off its power generation business, while also transferring its U.S. assets into an MLP. Known for the Keystone XL pipeline, TransCanada is much more than that; however, the stalling of the Keystone yet again puts in focus the fact that the company only offers a 3.7% dividend yield, well below its oil/gas infrastructure peers. It needs to generate more value for shareholders – with shares up 37% over the last five years, while the S&P 500 is up 80%. Sandell is just a small TransCanada shareholder. But that hasn’t stopped it from waging a proxy battle in an effort to get the company to reorganize its corporate structure. Sandell puts TransCanada’s fair value at C$75 a share, which is over 40% upside. Sandell Asset Pro Forma Portfolio (Q3’14) (click to enlarge) (Source: stockpucker.com) The Sandell Basics Sandell wants TransCanada to split off its nuclear, coal and other power generation businesses; granted, without those it would likely be afforded a higher multiple, where it would also be a more stable business and not as dependent on commodity prices. Sandell also wants more asset dropdowns to TC Pipelines (NYSE: TCP ) – a U.S. pipeline MLP that TransCanada has a stake in. It already has plans to drop down stakes in natural gas pipelines to TC, but Sandell wants more. TransCanada plans to drop down $1 billion in assets to TC over the interim; Sandell thinks that number should be north of $10 billion. Selling all its U.S. pipelines to the MLP would reduce costs, given the MLP pays no taxes. This isn’t Sandell’s first rodeo with this type of deal; last year, it pushed Spectra Energy (NYSE: SE ) to drop down its U.S. assets to Spectra Energy Partners (NYSE: SEP ). Using MLPs is a way to pass profits to shareholders without having to pay taxes. Many of the other major oil/gas infrastructure companies turned to MLPs years ago; think Williams Companies (NYSE: WMB ). Yet, the big counter-argument from some of TransCanada’s top shareholders, which are Canadian institutions, is that they would not benefit as much from the U.S. MLP tax benefits. Our Thoughts TransCanada’s dividend leaves something to be desired when stacked up against its oil/gas infrastructure peers. However, the pipeline industry is heavily regulated and has some pretty high barriers to entry, and as a result, is fairly stable. The counter-argument to Sandell is that the pipeline projects are highly capital-intensive. Canadian pipeline companies are self-funding most of their large projects, and don’t need equity funding. With that, its cash distribution payouts are subpar to American counterparts. However, by TransCanada dropping more of its assets to the MLP, it would be able to boost its distribution payout to shareholders. That means a higher yield and higher stock price for the company. So there would be initial upside in dropping the assets down, but it wouldn’t be a long-term positive. TransCanada would be forced to undergo equity issuances to fund future pipeline projects. Where We Stand Sandell sees two key catalysts: one being the spin-off, two being MLP dropdowns. The spin-off seems the least likely of the two, but it also creates the least value. If TransCanada does show signs of utilizing its MLP more, it would seem to be a buying opportunity for investors. However, we would caution the move for investors with a long-term horizon, and question the suggested benefits to dropping down more assets to its MLP. Scalper1 News
Scalper1 News