Enbridge Stock (NYSE:ENB) witnessed a drop on Wednesday as investors processed the Canadian pipeline operator’s intentions to acquire three U.S. natural gas utilities in a deal valued at $14 billion. Enbridge revealed its ambition to establish North America’s largest natural gas utility platform shortly after the market’s close on Tuesday, causing its New York-listed shares to plummet by approximately seven percent during the after-hours session. Meanwhile, Toronto-listed shares experienced a 5.50 percent decline, trading at $45.51 as of 11:10 a.m. ET on Wednesday.
Under this deal, Enbridge plans to double the size of its gas utility business by acquiring East Ohio Gas, Questar Gas, and Public Service of North Carolina from Virginia-based Dominion Energy. The terms of the agreement entail Enbridge paying $9.4 billion in cash and assuming $4.6 billion in debt. The company intends to finance the transaction through a combination of debt and equity. On Tuesday, it announced a significant bought deal to raise $4 billion by selling 89,490,000 common shares to underwriters led by RBC Capital Markets and Morgan Stanley at a unit price of $44.70.
Enbridge’s CEO, Greg Ebel, addressed concerns about the equity issuance during a virtual press conference on Wednesday, stating, When you release new equity, it’s natural to expect some market fluctuations. What we’re conveying to investors, and what I anticipate will happen, is that investors will highly appreciate the returns we can achieve in this business.
However, Tudor, Pickering, Holt & Co. analyst Colton Bean expressed reservations about the bought deal, noting in a client note on Wednesday, “The concurrent announcement of a $4 billion bought deal offering largely de-risks financing, though at a steep cost, with the equity offering coming at a seven percent discount to the prior close.”
Enbridge anticipates that the acquisition, which requires approval from U.S. state and federal authorities, will conclude next year. The company forecasts that the new assets will contribute positively to cash flow in the first year of ownership. Ebel underscored the importance of this transaction, stating, We have a deal that presents a unique and unparalleled chance to acquire well-established, expanding natural gas utilities on a significant scale and at a historically appealing valuation.
Furthermore, Ebel pointed out that acquiring these utilities from Dominion would shift the company’s earnings mix closer to a 50-50 balance between crude oil and liquids, compared to its current ratio of approximately 60-40 in favor of natural gas and renewable energy. This deal helps us attain a better balance and increases our exposure to natural gas, which remains a vital fuel in our journey toward lower-carbon emissions, he elaborated.
Bean maintained a $54 per share price target for Enbridge’s Toronto-listed shares, characterizing Tuesday’s announcements as a “slight positive.” He noted, “While the deal screens well strategically and allows Enbridge to materially grow its utility base at a reasonable valuation, we expect some near-term weakness as the market contends with the additional equity and potential rebalancing of investors who are inclined to look elsewhere for utility exposure.”
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Author Faith Yakubu 
