I understand that the Federal Government is looking to sell the Trans Mountain pipeline, a pipeline it purchased from Kinder Morgan approximately a year ago for around 4.5 billion dollars.
A couple of weeks ago it was revealed that a group comprised of loosely aligned members of a distinct ethnicity have expressed an interest in purchasing 51% of the pipeline from the Canadian Government for 6.1 billion dollars. The news reports surrounding the proposed transaction did not reveal the source of the purchase monies. However, it is well known that the proposed purchasers do not have funds of that magnitude, or even close to that sum, sufficient to close the transaction. That is not surprising, as few organizations, corporations or individuals have that kind of money sitting idle, waiting for an investment opportunity. The funds, or probably the lion’s share of the funds, will have to be borrowed, and the obvious lenders would be one of, or a consortium of, Canada’s major banks.
If the Canadian federal government is seriously considering this rumored offer, it got me thinking: why do I not approach my neighbours to see if they would be interested in making a competing offer to buy the pipeline? I live in a crescent with forty-seven homes, all of which back on to a private golf course. Our neighbours have led, and are leading, successful careers in all kinds of endeavours but, I must admit, we do not have anyone on our street who knows much, if anything, about operating a pipeline. However, we do not consider that to be a detriment in that the other bidder also lacks the required expertise, We might even consider reducing our offer to 49.95% conditional upon an entity with folks knowledgeable in the operation of pipelines, and how they work, picking up the controlling interest from the government. To be honest, we haven’t thought through what would happen if a third party with pipeline expertise does not step up. However, as I will explain in a moment, my group does not intend to lose too much sleep over this minor problem.
My neighbours and I had a meeting and a committee was formed to explore the idea further. Not all our neighbours agreed that this was a good idea. They wondered, for example, where in the world we would be able to raise over 6 billion dollars. After all, although, collectively, we have been loyal taxpayers and have accumulated reasonable assets, realistically we have nothing approaching 6 billion dollars to pledge as security for a loan. But then again, neither, as we understand the facts, does the competing bidder.
Another objection was the magnitude of the purchase price. After all, the feds paid 4.5 billion for the whole thing last year and we were about to offer over 6 billion for just under 50% of the project. Some of my neighbours, the doubting Thomas types, thought we had taken leave of our senses, but I told them to reserve judgement until our committee could present them with all the facts.
Our steering committee of five neighbours decided to meet to further examine the possibility of making an offer to buy the pipeline. The committee was comprised of me, a widow, a landscape architect, a retired car dealer and a lad who makes dentures. I, a retired lawyer, was elected chairman of the committee.
Our first decision was to address all the objections that would surely come from those who were either opposed in principle, or were afraid that we did not have the expertise to get involved in a pipeline and could not understand how we could possibly raise such a large amount of money to complete the deal. We also decided to address the issue of price to satisfy those who had objections to giving the government such an upside profit in such a short period of time. We clearly understand there were bound to be various groups who would continue to oppose the construction of the pipeline, including members of the very group who were making the original bid.
We decided to put together a proposal to our neighbours, addressing all of these issues and to emphasize the massive potential profit we could make with virtually no risk to ourselves.
The report we submitted to our neighbours highlighted the following issues:
The price tag of plus or minus 6 billion dollars was, we determined, not really relevant because we would generate a great deal of income from the users of the pipeline, and those monies could be distributed amongst all our neighbours every quarter at our discretion. Of course, some of the money would have to go to the lenders who agreed to loan us the monies required to close the purchase transaction. However, if the revenue was not sufficient to pay us our quarterly dividend and make loan repayments as well, we would just cut back on the loan repayments and postpone those payments to a future date.
RAISING THE FUNDS:
As all our neighbours acknowledged, we did not have anywhere near the amount of money to complete this purchase. However, we suspected that was also the case with the competing bidder. Our committee’s idea, we explained, was to approach the big five banks to see if they would, together, lend us the money to buy the pipeline. In fact, prior to completing our report, members of our committee approached the aforesaid banks and presented them with our idea. I must admit that they were sceptical initially of our idea and were very concerned over our ability to repay a loan of that magnitude. That skepticism on the part of the banks persisted until we told them that we were pretty sure that a) the federal government would guarantee the repayment of the loan, and b) included in the funds we intended to borrow from the consortium of banks would be a loan placement fee payable to the participating banks equal to several hundred million dollars. That fee would, of course, be wrapped into the loan. The amount needed to close the transaction would be increased accordingly and the banks would be paid their fees in full on the closing date of the transaction. On this basis, the consortium of banks quickly advised that they were on-side with our idea and we could rely on them providing the necessary funding to complete the deal.
OPERATING THE PIPELINE:
Our committee was in agreement with some of our neighbours who opposed this idea because we, as a group, knew absolutely nothing about running a pipeline, if our offer were accepted. Then again, neither did the federal government: the present and future majority owner of the pipeline. Because we were buying less than 50% of the project, the operation of the pipeline would be the responsibility of the majority owner, the federal government. All we were going to do is, in effect, clip quarterly dividends on a predetermined guaranteed fixed sum. We even ran this by the consortium of banks and they announced they were on side with the idea. In fact, they advised that they really didn’t care what we did with the revenue because the way our proposed deal was structured, it was immaterial to them.
Our committee decided to make the above findings available to our neighbours with our recommendation that we proceed to make an offer. After all, we had the funds, the return was astronomical and better yet, we had absolutely no personal risk.
To my committee’s total, absolute surprise, our neighbours decided against proceeding. There were several reasons given but the main reason was that our proposal, if accepted, would be unfair to our fellow Canadian citizens. It just did not seem right that a group like ours should be allowed to buy something of this magnitude from the federal government, without incurring any financial risk and without making the same offer to all groups of Canadians. This ethical response, although surprising to some, was something I fully expected from my neighbours.
I can’t help but wonder if other bidders will come to the same conclusion.
By Rod McLeod