Spectra Energy Corp and Partners - Case Study Example

Spectra Energy Corp and Partners (USA) al Affiliation Spectra Energy Corp and Partners (USA) Introduction Mergers and/ or acquisitions continue to dominate the contemporary global business arena; influenced by various contexts and situational aspects. Due to the globalized nature of the contemporary era, such issues do have a profound impact, in terms of business competitiveness and overall sustenance; hence the prevailing necessity of mergers or acquisitions. Although both the two are perceived to ultimately fail in the creation of value for the different entity shareholders; this being in the long-term basis, pundits are of the view that they are healthy for market arenas. This is influenced by the fact that in situational contexts where the market economies are in a funk, firms do not engage in much dealing and trade. Consequently, critique provides that the presence and/ or increase of either activities, provides a positive sign of market confidence. Importantly, is the fact both inert human capacity, as well as ‘investor psychology’ are critical towards ensuring brighter futures. This is essentially what leads to the presence of both economic aspects; aimed at alleviating and bettering existing contexts in the international economic arena. In the U.S., just like other international contexts, mergers and/ or acquisitions, from the late 20th century onwards, experienced an upward surge. This is best represented by mega mergers or acquisitions i.e. Spectra Energy Corp (SE) acquisition by Spectra Energy Partners (SEP), which is the paper’s focus; Tokyo Electronic (TOELY) and Applied Materials (AMAT); US Airways (LCC) acquisition by American Airlines (AAMRQ), and Life Technologies (LIFE) acquisition by Thermo Fisher Scientific (TMO) amongst others in the global arena (InvestorPlace, 2013). The year 2013, though having notched amongst the largest of mergers and acquisitions within recorded human history, it was hardly a year of deal activity; though this did smartly pick up. During the first 9 months, the total volume of U.S. mergers and acquisitions did total to US$865.1 billion; attesting to the great influences, impacts and effects of such economic activities within the global economic sector. Accordingly, Dealogic (a global economic consortium) in its – Dealogic M&A Review [First Nine Months 2013 Final Results Report] – portrays that this figure was a 39% increase, over the same period the previous year. Subsequently, a number of deals did make mega splashes, while others were conducted quietly; with all being influential in the eventual recovery in M&A. such high amounts of monies spent on mergers and/ acquisitions were rivaled by 2008’s $915.8 billion worth of transactions; attesting to the high regard for these two economic aspects (Dealogic, 2013). Spectra Energy Partners (SEP) acquisition of Spectra Energy Corp (SE) According to PRNewswire (2013), the acquisition of Spectra Energy Corp’s storage, liquid and transmission assets, by Spectra Energy Partners became one of America’s hedge fund stock’s favorite. This is as a result of the huge impact and influence that this activity portends to the future of fee-based MLPs in the U.S. Through the deal, what is being offered on the table is about $8 billion, in terms of organic growth potential; focused by the end of this first decade of the 21st century. In addition, is the fact that it does result in the diversification of SEP’s portfolio, in terms of transmission, storage and energy revenues. Thus, not only are shareholder entities and individuals smiling, but also income seekers; buoyed by the fact that the entity expects to hit the 9% mark, in regard to is annual distribution growth going forward to 2015. It seeks to further diversify the prevailing SEP’s profile, regarding its steady (fee-based cash flows), augmented by an outstanding. On Aug. 6, 2013, SEP and SE announced the execution of their company boards’ agreement, which required to letting go of all the latter’s U.S. storage, liquid and transmission assets, to SEP. As a consideration, SE (Spectra Energy Corp) would receive172 million limited partner units, 3.51 million general partner units (both newly issued), in addition to $2.2 billion in cash form. In addition, was the assumption of SE’s $2.5 billion of debt, based on asset debt, by SEP; further influencing the average unit share price of their stocks. Subsequently, the transaction would expand SEP’S American reach, in terms of linkage between all main supply basins and pertinent connections; essential to key growth sectors (PRNewswire, 2013). This is essential in expanding SEP’s outreach through much steadier cash flows, expansion opportunities and market growth, as the firm’s website Spectra Energy (2014) showcases. This is to further influence the entity’s overall distribution growth, with focus on increased distribution payments; measured per unit. Arguably, this will position the entity as one of the leading storage and pipeline limited partnerships within North America’s oil and gas sector. Informing this move therefore, was the need to streamline its logistics and expenditure arms of the business and the greater targeting of growth potential region, in addition to tackling the aforementioned $ 2.5 billion asset debt that was acquired from SE. Being a master limited partnership, the entity holds in its portfolio, interests in crude oil and natural gas pipeline and storage assets, within North America. This is inclusive of: - natural gas storage, approximated at roughly 57 billion cubic feet; crude oil storage of 4.8 million barrels, and more than 5,300 miles of gathering and transmission pipeline. Focus is placed on asserting their presence in the energy sector, by way of connecting the growing supply arenas, to the increasing high-demand market regions. Due to the fact that a majority of America’s natural gas transportation volumes are contracted under long-term firm service agreements, the entity aims at enhancing its efficiency and effectiveness within the energy sector. This is both in terms of supply/ distribution and storage, which require consistency and efficiency; as delays or disruptions could easily affect prevailing contractual agreements present. Under this, a significant expansion opportunity avails itself, within North America’s energy sector; as a result of its strategically located asset-base (Spectra Energy, 2014). In addition, is the focus aimed at further enhancing utility of DCP Midstream Ltd., which the entity holds a 50% ownership stake. Being the largest processor and producer of natural gas in the U.S., as Bhandaru (2014) provides, this would better improve chances of overall efficiency and effectiveness across North America. With its term of service exceeding a century, this ‘merger’ will further solidify the entity’s market-hold; based on its improved logistical capacity. Having engaged in this, the entity transforms into a bigger energy sector player, availing to essential use, its currently acquired ‘economies of scale’ advantages. Through this avenue, the aforementioned asset-based debt will be easily taken care of, mitigated by improved sales volumes vis-à-vis gradual expenditure reduction, as well as being augmented by net income from its securities and stock options. Drop-down transactions being accretive, will provide shareholders with higher dividend level growth (both firms), resulting in each share gaining 12 cents, as opposed to the previous 8 cents. In addition, will be SEP’s benefit from the acquired fee-based aspect of business; especially as a result of its transmission assets characteristic of remaining commodity price-neutral. Drop down assets will in turn further strengthen its financial capacity, in regard to carrying out projects in the pipeline, as well as diversification into other sectors of the energy industry. An example would be the recent acquisition of Express-Platte Pipeline System; previously under the ownership of Kinder Morgan Energy Partners and affiliates. It provides one of the three core pipeline systems, which transports crude oil to the U.S., from Canada (Bhandaru, 2014). Organizational Structure: New Entity In terms of structural organization of the newly-formed entity, there will be little change as the deal was mainly aimed at ‘consolidating the two firms’ separate attributes, aspects and distinguished characteristics. The aim, as agreed by both firm’s board members (prior to the transaction), was towards streamlining operation through positive partnership/ collaboration between the two. As a consequence, it is more of a consolidating move, where all assets, capacity and economies of scale gained are to be utilized towards enhancing SEP’s greater presence within North America. This integration, was/ is aimed at fusing the previous two entity’s core capacities and strengths, into the single firm, thus a majority of changes that have taken place, pertain to the absorption/ merger of roles, departments, sections and even management (Bhandaru, 2014). Currently, Mr. Greg Ebel is chair of both entities (individually and group-capacity), in addition to being chief executive and president. He is also a board member of the entity’s affiliate DCP Midstreams. Deputizing him is Dorothy Albes, Chief Administrative Officer (CAO), with other leaders presiding over the entity’s various subsidiaries. There is Stephen Baker (President of Union Gas Ltd), Douglas Bloom (President of Canadian LNG) and Mark Fiedorek (President of Spectra Energy Transmission West). In addition, are Guy Buckley, the Chief Development Officer (CDO), and Julie Dill, the Chief Communications Officer (CCO). The pattern follows through, down to the departments, hence deeming this integration as being both aligned and centralized into a single structure Thus, prior to the event, there were two heads/ leadership positions, as well as board of Directors and other committees; all being integrated into single units/ positions of representation. Human resource management practices were modified slightly, in line with the interrelated role-play of both the previous two separate firms. However, these changes being slight in terms of effects and impacts, they did provide the much needed streamlining of the amalgamated firm-entity; especially in terms of operational cost expenditure, logistics and company overheads. Since the employee forces of the previous two separate entities, were related to the energy sector, further changes were not applicable or necessary. In essence this just required the re-allocation of pertinent workforces, to their fields of specialty, within the new, stream-lined mega entity (Spectra Energy, 2014). Conclusion While mergers and acquisitions often are viewed as negative in nature, especially as a result of subsequent negative influences i.e. job losses, fall in share-pricing and asset loss amongst others, the action taken by both SE and SEP, can be deemed as positive and worthwhile. This is informed by the fact that the two entities, while being in some form of ‘competition’, were essentially linked in their baselines. Thus through the action, it only symbolized the realization of the need for enhanced partnership, based on mutual interests that were focused on enhanced tapping of the growing Northern American energy market arena. References Bhandaru, K. (21 May 2014). Why Spectra Energy Partners is Integral to Spectra Energy Corp. Market Realist Inc. [Democratizing Investment Management], retrieved from: http://marketrealist.com/2014/05/spectra-energy-partners-integral-spectra-energy-corp/comments Dealogic. (Dec. 2013). Global M&A Review. Dealogic: Global M&A Review [First Nine Months 2013] Report, retrieved from: www.dealogic.com/media/81237/dealogic_global_m_a_review_-_first_nine_months_2013.pdf InvestorPlace. (2013). Mergers and Acquisitions – The 10 Biggest Deals of 2013. InvestorPlace: Market Insight [Financial Articles – Hot Stocks: Mergers and Acquisitions], retrieved from: http://investorplace.com/2013/12/mergers-and-acquisitions-biggest-deals-2013 Leadership. (2014). Spectra Energy [About Us: A Snapshot of Our Leadership Team], retrieved from: http://www.spectraenergy.com/About-Us/Leadership/ PRNewswire. (6 Aug. 2013). Spectra Energy Partners Announces Agreement to Acquire Spectra Energy Corp’s U.S. Transmission, Storage & Liquid Assets By Year End. PRNewswire; News Releases [Utilities: Oil & Energy – Acquisitions, Mergers and Takeovers], retrieved from: http://www.prnewswire.com/news-releases/spectra-energy-partners-announces-agreement-to-acquire-spectra-energy-corps-us-transmission-storage--liquids-assets-by-year-end-218487701.html Spectra Energy (2014). News Release: Spectra Energy Partners Announces Agreement to Acquire Spectra Energy Corp’s U.S. Transmission, Storage & Liquid Assets. Spectra Energy: Investors, retrieved from: http://investors.spectraenergy.com/phoenix.zhtml?c=204494&p=irol-newsArticle&ID=1844848&highlight= Read More