Bigger isn’t necessarily better in business. But when it comes to companies that own essential physical assets in capital-intensive industries, it almost always is.

That’s the case for companies involved in two major mergers in the Canadian Edge universe this month. From the energy infrastructure sector, the proposed union between Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF) and Provident Energy Ltd (TSX: PVE, NYSE: PVX) is set to create a powerhouse of pipelines, processing facilities and marketing expertise with potential for explosive growth serving Canada’s burgeoning natural gas liquids (NGLs), oil sands and light oil producers.

Meanwhile, Dundee REIT’s (TSX: D-U, OTC: DRETF) acquisition of Whiterock REIT (TSX: WRK, OTC: WRKUF) will create the country’s fourth-largest real estate investment trust and largest owner and operator of office properties.

CE readers who owned Conservative Holding Provident have already received a windfall gain of roughly 20 percent since the deal was announced. And when the merger is consummated, probably late in the first quarter of 2012, they’ll get an immediate 27.5 dividend increase. Whiterock REIT holders, meanwhile, have seen prices of their units jump by 25 percent.

For both mergers, however, the more attractive play now by far is the acquirer. For one thing both targets are now fully or nearly fully priced to their takeover value. There’s no more upside, other than possibly from appreciation in the price of their acquirer, and for US investors from a boost in the Canadian dollar versus the US dollar.

Currency appreciation will also benefit holders of the acquirers. Moreover, should these mergers fail for whatever reason, shares of Provident and/or Whiterock would almost certainly plunge. That won’t happen to Pembina and Dundee with or without a deal.

In addition, Pembina shareholders receive an immediate benefit from the Provident takeover: a 3.8 percent dividend increase at the close. That’s the first dividend boost for Pembina since September 2008, when the company was still an income trust. Better, management has promised annual dividend growth of at least 3 to 5 percent thereafter, as the company executes on enhanced opportunities to expand its base of absolutely vital fee-generating energy infrastructure assets serving the fastest-growing areas of Canada’s energy patch.

Not surprisingly behind the curve, credit rater Standard & Poor’s immediately put Pembina’s credit rating on watch for a possible downgrade. That negative opinion certainly wasn’t shared on Bay Street, where several analysts immediately upgraded the stock. It’s not shared by company insiders, either, who have been prolific buyers of the stock the past few months. And it’s had no impact on Pembina’s cost of debt capital; the company’s 10-year debt still yields barely 4 percent to maturity.

The deal does temporarily add some commodity-price risk to Pembina’s cash flow. Management has promised to reduce the percentage of revenue affected by locking in prices where possible. But in the near term  the added risk should work to its favor, just as it has for Provident the past few quarters. Mainly, it’s all in NGLs, which are seeing soaring demand both in North America and overseas.

Risk to changes in NGLs prices will also decline as the company adds new fee-generating assets. Current projects include liquids extraction facilities, NGLs pipeline expansion, storage development and expansion of fractionator capacity. Ironically the balance sheet gets an immediate boost, with senior debt to cash flow falling to approximately 2.4-to-1. Access to equity capital, meanwhile, should improve as Pembina lists its shares post-deal on the New York Stock Exchange (NYSE).

The new Pembina will have assets positioned to serve all of Canada’s major shale-rich areas, the Athabasca oil sands, Pelican Lake heavy oil, the light oil Cardium and Bakken trends and also NGLs-rich Marcellus and Utica shale in the US. But the company will still rank as one of the smaller players in North America, particularly compared to giants that are also investing heavily in NGLs, such as Enterprise Products Partners LP (NYSE: EPD) and its USD44.4 billion market cap.

This leaves open the door for an eventual takeover of the combined Pembina-Provident. Whether it happens or not, there’s plenty of growth here for the new company in cash flows, distributions and, ultimately, the share price.

Now selling roughly 10 percent off the all-time high it set last year, Pembina Pipeline is a strong buy for those who don’t already own it up to USD28.

Provident Energy shareholders should plan to hold on through consummation of the merger, at which time they’ll own Pembina stock.

Scale is also important to the real estate business, as larger companies can better reserve against trouble with individual customers and also enjoy superior access to financing. The new Dundee will have close to 30 million square feet of gross leasable area, adding 88 properties and eight Canadian provinces with the Whiterock deal.

Office properties are one of the more economically sensitive subsectors of real estate. Dundee, however, has consistently maintained its monthly distribution in all environments, including the 2008-09 downturn. This resilience is at least partly due to knowledge of key markets, including nine of the 10 largest in Canada. The top 10 tenants are all high-quality, investment-grade companies. And net operating income at existing assets is rising at a steady 2 to 3 percent a year.

The deal extends the average term of Dundee’s leases to 5.8 years from the current 5.3 years. It also provides opportunities for cost savings, including CAD1.2 million from internalizing property management and CAD400,000 to CAD500,000 in annual general and administrative costs. And there are opportunities to add revenue with greater value-added services.

During a conference call arranged to discuss the merger, Dundee CEO Michael Cooper stated the new company had no “long-term interest in any of the retail properties” acquired with Whiterock. This suggests some asset sales ahead that will further help reduce the REIT’s post-deal leverage. Sales could also include the two US assets acquired with the deal, which have a value together of about CAD90 million to CAD100 million.

The goal is to bring down debt to at least 53.5 percent of capital. Pursuing that could limit more aggressive property expansion, as well as distribution increases in the near term. Cooper did state, however, that “it’s very unlikely that we’re going to go 11 months without buying anything.”

Looking ahead, only 5.7 percent of portfolio leases expire in 2012, and Dundee has already renewed 30 percent of those. Another 8 to 9 percent come due in 2013 and 2014, making them more important years for renewals. The portfolio, however, has rents that are generally below market, which should make new signings accretive to cash flow.

Ultimately, it’s the 6.5 percent yield paid monthly that will be the primary attraction for most investors. That’s more than a percentage point above that of most other Canadian REITs and three times what US favorite Boston Properties Inc (NYSE: BXP) pays–and with considerably less risk.

What insider action there’s been in Dundee has been buying. Analysts, meanwhile, remain generally bullish, with five “buys” and two “holds.” The units are still 25 percent below the all-time high they hit on Jun. 8, 2007. I look for them to visit those heights again later this year. Buy Dundee REIT up to USD35.

What can go wrong at these companies? In any merger there’s the chance of corporate culture clash, post-deal management disputes, suboptimal management of certain assets and negative financial impact if the acquirer has actually paid too much.

None of these should mar the aftermath of either of these deals.

For one thing, assets of both combinations are quite complimentary. Both Dundee and Whiterock, for example, focus mainly on owning and managing office properties, which will be 90 percent of assets of the post-deal REIT.

Adding Whiterock does add some geography, but generally the skill sets of the two companies are very similar. Meanwhile, CEO Michael Cooper of Dundee and Whiterock CEO Jason Underwood are already well acquainted and appear focused on pooling their respective expertise.

As for the price, Whiterock is going for about 1.3 times book value. That’s right in line with other players in the Canadian REIT sector. And it’s only about 40 percent of the valuation of US office property REIT Boston Properties. The buyout price is roughly a 20 percent premium to Whiterock’s pre-deal trading range. But it also comes with a slightly lower dividend for Whiterock unitholders, at least initially.

The result is a lower cost of equity capital for the combined enterprise than Whiterock was dishing out previously. Dundee also has a much lower cost of debt capital, which should help slash interest costs as Whiterock debt matures and as the REIT works to refinance at lower rates. Dundee currently has the ability to place 10-year fixed-rate mortgages on properties at a rate of just 3.75 percent.

This kind of low-cost capital makes a lot of deals worth doing, and the result should be enhanced expansion for Dundee, lifting cash flow and eventually distributions and the unit price.

In the case of Pembina-Provident assets are arguably even more complementary. The key challenge for the acquirer will be reducing exposure to commodity price swings–in this case NGLs price spreads–to bring fee-based revenue back to its historic range of around 90 percent. Fortunately, in the current favorable pricing environment there should be little problem locking in solid prices as far as the eye can see, securing cash flows and eliminating energy price risk.

Pembina is paying about a 25 percent premium above Provident’s pre-deal trading range. This deal, however, is all-stock and so adds only the latter’s legacy debt. Moreover, it affords substantial savings for new projects, including plans for a new NGLs fractionator to meet soaring demand in the Fort Saskatchewan area.

Pembina CEO Robert Michaeleski confirmed during a merger announcement call on Jan. 16 that the new company intends to keep all or most of the management of both pieces. If so the immediate labor savings will be limited. But this is the best way to position the new Pembina to bid for as many profitable projects as possible. Mr. Michaeleski envisions CAD700 million in projects–with capacity contracted, or “un-risked”–in 2012, with another CAD3.8 billion identified for future development.

There’s still the possibility that regulators in Canada will choose to veto either or both deals, and/or that shareholders won’t vote for them in sufficient numbers. Unlike the US, however, Canada’s ruling government isn’t running for reelection and trying to impress supporters by getting tough on corporations. And since neither company is of the scale of, for example, TransCanada Corp (NYSE: TRP), Competition Act of Canada approval also appears set.

There’s a termination fee of CAD100 million for both Provident and Pembina should one of the parties elect to pull out. The market’s positive reaction to the deal, however, would seem to make two-thirds shareholder approval nearly certain when the matter comes to a vote at special meetings scheduled for Mar. 27.

As is the case with Pembina-Provident, Dundee’s acquisition of Whiterock will require approval of two-thirds of the latter’s unitholders, with the vote slated for a special meeting on Feb. 27. The deal also needs approval under the Competition Act of Canada. But given the diffuse nature of the Canadian REIT sector, this should not be a problem either.

There is one complication with the Dundee-Whiterock deal that affects US investors. US unitholders of Whiterock REIT will be cashed out when the merger is concluded rather than have the opportunity to hold Dundee units. I therefore strongly recommend US investors buy Dundee rather than Whiterock as a way of getting aboard this deal.

There should be no withholding taxes on proceeds paid to US investors from the cash out, as this isn’t a dividend but a return of capital. But as we’ve seen all too often in the past, incorrect withholding can and does occur, particularly when a brokerage house is less than skilled with dealing in Canada.

Whiterock unitholders have the option of taking CAD16.25 per unit in cash or 0.4729 units of Dundee. Whiterock’s current price of CAD16.08 per unit is less than half a percentage point below the cash takeout value of CAD16.25 and actually a bit above the current value of the equity portion of the deal, which is roughly CAD16 based on Dundee’s current price.

No more than 60 percent of the entire consideration of this deal can be made in cash. If more is demanded, unitholders will receive a portion in units and a portion in cash. As a result Whiterock units are already fully priced to the deal. Canadians who hold on could realize additional appreciation from what should be solid upside in the new Dundee.

US investors, however, have absolutely no reason to hang on at this point, as they’ll be cashed out anyway. US investors who own Whiterock should sell now and buy Dundee.

Dundee will see its debt-to-capital ratio hit close to 60 percent should Whiterock unitholders elect to take the maximum amount in cash of CAD360 million. This number should come down expeditiously through a combination of asset sales–CAD40 million have already been targeted–and enhanced operating cash flow.

Note that there are no tax consequences for holders of Dundee REIT in this transaction, as it’s the acquiring company. Taxes will be due on capital gains incurred by US and Canadian investors in Whiterock. The Pembina-Provident deal is tax-free to US and Canadian investors of both companies, as it’s all in stock.

For more information on Dundee and Pembina, go to How They Rate. Dundee is tracked in the Real Estate Trusts group. Pembina is covered under Energy Infrastructure. Click on their US symbols to see all previous writeups in Canadian Edge and CE Weekly. Click on the Toronto Stock Exchange (TSX) symbol to go to their Google Finance pages for a wealth of information, ranging from news releases to price charts. Click on their names to go directly to company websites.

Both companies are reasonably large, which should make it very easy to buy them either in Canada or in the US. Dundee has a market capitalization of CAD2.35 billion, which will reach nearly CAD3 billion when the Whiterock REIT merger is completed.

Pembina is larger still with a market cap of CAD6.63 billion, which will rise to nearly CAD10 billion when the Provident Energy merger is consummated.

Both stocks trade with substantial volume on their home market, the TSX. Pembina is slated to trade on the NYSE once the Provident merger is completed. Dundee has no such plans but should trade higher volume in the US over-the-counter (OTC) market under the symbol DRETF.

As is the case with all stocks in the Canadian Edge coverage universe, you get the same ownership whether you buy in the US or Canada. These stocks are priced in and pay dividends in Canadian dollars. Appreciation in the loonie will raise dividends as well as the value of your shares.

Dividends of both companies are 100 percent qualified for US income tax purposes. Pembina is organized as a corporation, so dividends paid into a US IRA aren’t subject to 15 percent Canadian withholding tax. Dundee is a REIT and so will likely continue to be withheld at a 15 percent rate whether inside or outside of an IRA.

Dividends paid by both companies to non-IRA accounts are withheld 15, which can be recovered as a credit by filing a Form 1116 with your US income taxes. The amount of recovery allowed per year depends on your own tax situation. Canadian investors may be able to defer some of their tax burden as a return of capital.