Energy Income Partners, LLC Comments on TC PipeLines, LP Supplemental Disclosures to the Merger Proxy Statement/Prospectus, Maintains Its Intent to Vote Against Proposed Merger with TC Energy Corporation
A copy of EIP’s letter is below. A full copy of EIP’s initial letter sent to the Board on last Friday, including supporting analysis of its objections is available on EIP’s website, www.eipinvestments.com.
Members of the Board of Directors
Re: TCP/TRP Merger Proposal Vote
Ladies and Gentlemen:
After EIP’s letter on Friday to the TCP Board, EIP has more thoroughly reviewed TCP’s Form 8-K filing with the
- The Merger Proxy contains what appears to us to be a disturbing and unusual fact pattern wherein the two members of the Conflicts Committee negotiated for separate and additional Indemnification Agreements while concurrently negotiating the exchange ratio and other aspects of the Merger Agreement on behalf of TCP unitholders. Why did the Conflicts Committee negotiate for legal protections during this process over and above what was historically deemed necessary?
- The Proxy firm ISS took the rare approach of issuing a “cautionary supportFOR” the merger as evidenced by their flagging the merger vote as “deserving attention due to contentious issues or controversy”. We view this as an important and notable distinction for TCP’s unitholders. In fact, yesterday, ISS reiterated their “cautionary” qualifier to their recommendation citing EIP’s letter from last
Friday, February 19, 2021. Why was this caveat left out of TCP’s recent press releases to the public citing ISS’ “FOR” recommendation?
- As mentioned in our prior letter, EIP believes Evercore’s precedent transaction analysis is deeply flawed. Even using Evercore’s analysis, the additional disclosures in the 8-K provide a mean/median EV/EBITDA transaction multiple on precedent transactions of approximately 10x. This is 10% higher than the proposed merger valuation multiple that equates to a 20% higher per unit equity price than the current offer. Why did the Conflicts Committee accept an exchange offer that was 20% below that suggested by the data cited by their financial advisor Evercore?
- Evercore’s reliance of the valuation measure EV/EBITDA for asset sale transactions to justify TRP’s offer for TCP is problematic.
- EV/EBITDA ignores the payments to the general partner in the form of GP incentive distribution rights (“IDRs”) and so depresses the multiple. Why weren’t these multiples adjusted higher accordingly? Yesterday,
Kinder Morganannounced the partial sale of 25% of Natural Gas Pipeline of America (NGPL) at 11.2x EBITDA. NGPL is highly comparable to TCP assets and has no incentive payments to general partners.
- EV/EBITDA ignores taxes and incentives to general partners which are paid by equity holders just as interest payments on debt and capital to sustain the business. What matters to equity holders is earnings per share. Isn’t this why long-term investors such as
Warren Buffetand Charlie Mungerhave repeatedly derided EBITDA as a poor/misleading earnings measure? Why wasn’t a thorough valuation analysis of after-tax earnings to unitholders given the same consideration as EV/EBITDA?
- The treatment of taxes paid by unitholders in Evercore’s analysis highlighted in the 8-K was, in our view, biased and incomplete. Evercore has reduced the value of TCP units by personal taxes paid by those unitholders but ignored both the dividend tax and the 15% Canadian withholding tax TCP unitholders would pay as TRP shareholders following the merger. Why wasn’t an apples-for-apples type of valuation exercise conducted or relied upon?
Considering the above items raised around the adequacy of the merger consideration and fairness of the process, EIP strongly believes the Conflicts Committee was not fully informed in their decision to approve the merger. Accordingly, EIP requests that the GP Board postpone the upcoming Merger Vote so that the Conflicts Committee can re-convene to consider the additional information that we and others have provided. Further, it is EIP’s view that the Conflicts Committee must either 1) re-open the merger negotiations to obtain a fair and reasonable valuation for
While EIP does not currently object in principle to the Board’s determination to pursue a merger, we believe that terms of the proposed merger are unfair to unitholders. EIP’s intention remains to vote “AGAINST” the proposed merger of TCP and
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