Are TerraForm Shareholders Getting Enough Premium in Their Buyout Offer?

While much attention has been given to efforts of moving beyond fossil fuel use in the twenty-first century, many infrastructure entities from utilities to investment companies to government-related entities have been carrying onward and forward with acquisitions or expansion into alternative and renewable energy projects. As the field becomes more competitive against the cost of fossil fuels, some of the moves should seem rather obvious. Now there is news that TerraForm Power, Inc. (NASDAQ: TERP) has received an offer to be acquired. The terms of the deal may seem less than exciting to some outside investors, and some may wonder if the deal is juicy enough to existing shareholders, but the proposed price may also be better than the value as a standalone entity.

Brookfield Renewable Partners L.P. (NYSE: BEP) has made an offer to acquire the rest of TerraForm Power, Inc. that the partnership did not already own at a set exchange ratio of 0.36 BEP units per TerraForm share. The offer constituted an 11% premium to TerraForm Power’s current trading price and Brookfield is seeking to make it one of the largest integrated pure-play renewable power companies in the world.

TerraForm Power, the former SunEdison Yieldco, owns and operates clean power generation assets in the fields of solar energy, wind energy, and in the regulated solar/wind segment. It had operations in the United States, as well as in Canada, Spain, Chile, Portugal, Uruguay and the United Kingdom. What should stand out about Monday’s announced proposal is that parties tied to Brookfield already owned more than 60% of the company.

According to Brookfield’s statement, the merger is expected to be immediately accretive to Brookfield Renewable while it further expands upon its renewable portfolio in North America and in Europe. The transaction would also allow TerraForm Power’s shareholders to benefit from the combined company’s global development pipeline, an investment grade balance sheet with increased liquidity and from more diversification.

As for the accretive portion of the transaction, Brookfield Renewable also approved a 5% increase to the partnership’s quarterly distribution up to $2.17 per unit. The next quarterly distribution in the amount of $0.5425 per unit is that 5% increase, and Brookfield’s press release indicated that the entity is targeting a sustainable distribution that increases by an average of 5% to 9% per year.

Sachin Shah, CEO of Brookfield Renewable, talked up the combined entities. He said:

We believe this transaction will create significant value for investors in both companies through a simplified corporate structure and continued sponsorship from Brookfield Asset Management. For Brookfield Renewable unitholders, this transaction is expected to be immediately accretive and further expands our portfolio in North America and Western Europe, all while delivering returns in-line with our targets. Further, the proposed transaction will enhance the liquidity of the BEPC shares… TerraForm Power shareholders, in turn, will benefit from access to a broader growth mandate that includes global, multi-technology and development opportunities, and increased access to capital and liquidity, underpinned by an investment grade balance sheet.

The Refinitiv consensus analyst target price for TerraForm Power was just $16.38 ahead of the news and was barely higher than the $15.52 prior closing price. Shares of TerraForm Power were trading up 10% at $17.16 at Monday’s closing bell on about 7-times normal trading volume, with a 52-week trading range of $11.25 to $18.48.

Brookfield Renewable Partners L.P. saw its units trade down by 4.2% at $46.05 on Monday, with a 52-week range of $27.71 to $48.76. Its market cap was last seen at about $8 billion, versus an adjusted market cap of closer to 44 billion for TerraForm Power.

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