Enbridge's Series 11 Preferred Shares: A Tale of Low Conversion and Strategic Moves

Enbridge Inc., the Canadian energy infrastructure giant, recently announced the results of its Series 11 Cumulative Redeemable Preference Shares conversion offer. The outcome? Less than 1,000,000 Series 11 Shares were tendered for conversion, falling short of the required threshold to initiate the conversion into Series 12 Shares. This low conversion rate begs the question: what factors contributed to this outcome, and what strategic moves might Enbridge consider to enhance the appeal of its preferred shares to investors?

First, let's examine the factors that may have influenced the low conversion rate:

1. Dividend rate: The annual dividend rate applicable to the Series 11 Shares for the five-year period commencing on March 1, 2025, was set at 5.477 percent. This rate, while competitive, may not have been attractive enough for holders to convert their shares into Series 12 Shares, which offered a floating rate dividend.
2. Market conditions: The overall market conditions and investor sentiment may have played a role in the low conversion rate. If investors were pessimistic about the company's prospects or the broader market, they might have been less inclined to convert their shares.
3. Uncertainty about future dividends: The Series 12 Shares offered a floating rate dividend, which could fluctuate quarterly. Holders of Series 11 Shares might have been hesitant to convert if they were uncertain about the future dividend payments or the potential impact of interest rate changes on the floating rate.
4. Broker or intermediary communication: Beneficial holders of Series 11 Shares who wished to exercise their right of conversion during the conversion period were advised to communicate with their brokers or other intermediaries well in advance of the deadline. Any notices received after this deadline would not be valid. If there was a lack of communication or misunderstanding between holders and their intermediaries, it could have contributed to the low conversion rate.

Now, let's explore some strategic moves Enbridge might consider to enhance the appeal of its preferred shares to investors:

1. Adjust the conversion threshold: Enbridge could lower the conversion threshold to make it easier for holders to convert their Series 11 Shares into Series 12 Shares. This could encourage more investors to participate in the conversion process, increasing the likelihood of meeting the threshold in the future.
2. Offer a higher dividend rate for Series 12 Shares: To make the Series 12 Shares more attractive, Enbridge could consider offering a higher dividend rate for these shares. This could incentivize investors to convert their Series 11 Shares, as they would be receiving a higher return on their investment.
3. Provide additional benefits or perks for Series 12 Shareholders: Enbridge could offer additional benefits or perks to Series 12 Shareholders, such as priority access to new investment opportunities, exclusive reports, or other value-added services. This could make the Series 12 Shares more appealing to investors and encourage them to convert their Series 11 Shares.
4. Improve communication and education: Enbridge could enhance its communication efforts to educate investors about the benefits of converting their Series 11 Shares into Series 12 Shares. This could include hosting webinars, publishing articles, or sending targeted emails to shareholders, explaining the advantages of the conversion and addressing any concerns they may have.
5. Consider a mandatory conversion: If the conversion threshold is consistently not met, Enbridge could consider implementing a mandatory conversion for all Series 11 Shares, regardless of the number tendered. This would ensure that all shareholders have the opportunity to benefit from the advantages of the Series 12 Shares, while also simplifying the conversion process for the company.

By implementing these strategic moves, Enbridge could enhance the appeal of its preferred shares to investors, potentially increasing the conversion rate and ensuring the success of future conversion offers.