Dear prudence

TransCanada's pipeline deal suggests safe now sexy

TransCanada's $13 billion pipeline deal suggests safe is now sexy when it comes to energy M&A. Buying Columbia Pipeline bolsters the Canadian energy company's business of transporting gas to the Atlantic seaboard. The seller has ample cash and a backlog of lower-risk projects to build infrastructure. It all adds up to a prudent investment as markets sour on precarious boom-time assets.

The transaction makes strategic sense, coming less than six months after the Obama administration nixed TransCanada's controversial Keystone XL oil pipeline project across the United States. The Canadian group will get control of Columbia's growing network of pipes connecting the Marcellus and Utica shale gas fields of northern Appalachia to markets on the Atlantic and Gulf Coasts, where demand for gas is booming.

Columbia's shares haven't been immune to the painful downturn in oil and gas prices. Its business looks steadier, however, than that of rivals with huge debt or concentrated exposure to troubled customers.

The company's net debt to Ebitda ratio of around three times is about half that of more stretched peers like Kinder Morgan and Williams Companies, according Thomson Reuters data. Columbia has ample cash, having raised $1.4 billion of equity in December to keep building through the downturn. A backlog of regulated pipeline projects, with financial returns set by the Federal Energy Regulatory Commission, should allow it to keep growing cash flows without taking undue risks.

Though Columbia looks like a safe bet overall, TransCanada's offer is bold in one respect. It values the target at an approximately $2.3 billion premium over what it was worth before talk of a potential bid surfaced last week. The $250 million of annual savings and other benefits that TransCanada expects to realize from the deal, meanwhile, might be worth just $1.9 billion in present-value terms after tax, based on a rough Breakingviews calculation. The extra premium suggests a strong appetite for safety at a time when over-leveraged energy companies are squirming.