by BNN.CA

Pembina Pipeline Corp. (PBA) will buy smaller rival Veresen Inc. (TSX:VSN) in a $9.7 billion stock-and-cash deal, the expanding Canadian company said on Monday, the latest deal in a sector that has been consolidating in the face of low commodity prices and high costs. The offer represents a 22.5% premium to Veresen's last close.

With prices slow to rebound from a two-year slump, pipeline companies have been under pressure to merge as they grapple with overcapacity and sliding tariffs. Investors have doubted the sector's ability to generate returns, with no major projects on the horizon beyond a few currently approved ones.

The combined company boasts a market capitalization of $22.7 billion, pushing third-place Pembina further ahead of smaller rivals and closer to the realm of giants $91.4 billion Enbridge Inc. (ENB) and $54.7 billion TransCanada Corp (TRP). The deal is the latest in a wave of consolidation in the industry. In September, Enbridge announced a US$28 billion acquisition of Spectra Energy. That followed TransCanada's US$10 billion purchase of Columbia Pipeline Group in March last year.

AltaCorp Capital analyst Dirk Lever told BNN on Monday that:

“Strategically it makes an awful lot of sense.

Veresen has got some terrific assets in it and when you look at what’s going on in the Basin: Bigger is better. You’ve got very large players looking for infrastructure, key infrastructure. These are being provided by both Pembina and Veresen.

All in all it’s like a perfect fit, these two companies coming together.”

The deal gives Pembina access to Veresen's natural gas pipelines and processing infrastructure, granting it a stronger position in the Western Canadian Sedimentary Basin, home to major gas plays such as the Montney.

After the deal, the combined company will:

• own about 5.8 billion cubic feet per day of gas processing infrastructure across Western Canada by 2018
• and will have about 3 million barrels of oil equivalent per day of pipeline capacity.

AltaCorp Capital analyst Dirk Lever told BNN that he liked what the deal brings to the table for Pembina’s share price.

“If you were to draw a line between Calgary and Edmonton and go west of there, they effectively control the liquids-gathering systems for the most part in that area and it’s liquids that most people are after when they’re drilling. They have a stranglehold in the area.”

Lever doesn’t think the deal will draw the ire of the current U.S. administration, but hedged his bets in terms of the whims of the President.

“It’s not clear to me that Trump actually has any problem at all with the Canadian liquids business or the Canadian natural gas business, so I don’t think that he would get in the way. Although, I don’t read all his tweets … you never know.”