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Steel City Capital, LP Issues Public Letter to the Board of Directors of TC Pipelines, LP

·3 mins read

Steel City Capital, LP announced today that it has issued a public letter to the Board of Directors of TC Pipelines, LP (NYSE: TCP) regarding TC Energy Corporation’s (TSX: TRP) potential purchase of TC Pipelines’ outstanding public units. The full text of the letter follows.

October 7, 2020

Board of Directors
TC Pipelines, LP
700 Louisiana Street
Suite 700
Houston, TX 77002

Dear Members of the Board:

Steel City Capital, LP (the "Partnership") is a value-oriented investment partnership that seeks to acquire interests in high-quality businesses that are trading substantially below their intrinsic value. In TC Pipelines, LP (NYSE: TCP), we have found a business characterized by a high degree of cash flow visibility and stability, strong investment-grade counterparties, and an attractive valuation. For these reasons, the Partnership counts TCP among its top holdings.

I am writing to communicate my objection to TC Energy Corporation’s (TSX: TRP) recent offer to acquire all of TCP’s common units at an implied price of $27.31 per unit. I harbor deep concerns that the offer represents a steep discount to TCP’s intrinsic value.

Over the past several years there have been a number of similar transactions whereby parent entities have elected to "buy-in" their MLPs. The table below includes the valuation multiples of these comparable transactions. It’s worth highlighting that excluding the acquisition of Boardwalk Pipeline Partners by Loews – a transaction in which several parties raised concerns about the potential abuse of unitholders1,2 – historical transactions have been executed at an average of 11.2x EBITDA. Viewed in this context, TRP’s offer to acquire TCP at a multiple of only 8.2x FY’2021E EBITDA significantly undervalues TCP’s diversified portfolio of high-quality assets.

Transaction

Transaction

multiplei

APU/UGI

10.6x

BWP/L

8.4x

DM/D

12.3x

EEP/ENB

10.8x

SEP/ENB

10.5x

TEP/TEGP

11.0x

WPZ/WMB

12.0x

Average

10.8x

Average ex. BWP/L

11.2x

TRP/TCP

8.2x

Sources: Barclays Equity Research report dated October 5, 2020, Sentieo, and Steel City Capital estimates

i. Implied TRP/TCP transaction multiple reflects proposed acquisition price of $27.31 per unit and FY’2021E EBITDA of $471 million.

Precedent transaction multiples imply TCP’s fair value is north of $40 per unit, where the units traded as recently as February 2020. Considering there have been no material changes to TCP’s business profile – asset utilization remains healthy, counterparty risk is low, and growth opportunities are robust – there is no reason that TCP shouldn’t garner the same valuation the market ascribed to it only several months prior.

I remain optimistic that the Conflicts Committee of the TCP Board will see this offer for what it is: an opportunistic attempt to purchase all of TCP at a steep discount to the company’s intrinsic value. Unless and until TRP makes an offer that I believe reflects the full and fair value of TCP, I plan to vote against any proposed transaction. I hope the members of TCP’s Conflicts Committee, along with a majority of TCP’s public unitholders, do the same.

Sincerely,

Michael G. Hacke, CFA
Steel City Capital Investments, LLC

ABOUT STEEL CITY CAPITAL, LP
Steel City Capital, LP is a long-biased investment partnership formed in 2018 and is located in Pittsburgh, PA. https://www.steelcitycap.com/

1 Bandera Partners Letter
2 TAM Capital Management Letter

View source version on businesswire.com: https://www.businesswire.com/news/home/20201007005935/en/

Contacts

Michael Hacke
Managing Member
(412) 545-3310
Mike.Hacke@steelcitycap.com