Last week, Bloomberg reported on a rumor that Brookfield Asset Management (BAM) was in talks to buy Abengoa’s (ABGOY) stake in its former YieldCo Atlantica Yield (ABY). Atlantica had been looking for a new sponsor for well over a year since parent Abengoa filed for bankruptcy.
Purchasing YieldCos (companies that own clean energy infrastructure and use the cash flows to pay large dividends to shareholders) is not new to Brookfield. Not only has BAM long sponsored Brookfield Renewable Partners, LP (BEP), a limited partnership that has essentially been a YieldCo since before the term was invented, but it is in the process of wrapping up the purchase of bankrupt SunEdison’s former YieldCos, TerraForm Power (TERP) and TerraForm Global (GLBL).
The smaller, TerraForm Global, is to be purchased outright for $5.10 a share. On October 3, the bankruptcy court cleared one of the final hurdles preventing GLBL from putting the matter to a shareholder vote by approving a settlement regarding directors and officers insurance.
The TerraForm Power purchase is further along, with the merger having already been put to a shareholder vote, with the deadline for submitting shares recently extended to October 12. Shareholders should make sure to participate in this tender offer and elect to take their compensation in shares rather than cash. This is because the cash compensation is worth less than the current share price, and shareholders who do not submit their shares will be assigned shares or cash based on the remaining after as many as possible shareholders who do make an election have been allocated the cash or shares of their choosing.
To understand the value of the cash or stock election, we need to consult the merger agreement. There we see that at the time of the merger, TERP will issue a special dividend of $1.97 per share -- 51 percent of the outstanding shares will then be purchased for $9.52 cash, while the remaining 49 percent will remain TERP stock.
Each share of TERP that is submitted for cash will be paid $9.52 + $1.97 = $11.49, or less than the current share price, around $13. The 49 percent of shares that are exchanged for more shares will get the $1.97 special dividend and, of course, a share of TERP stock.
Investors who are looking for cash from this merger are clearly better off selling the stock for $13 than electing to take $11.49 cash, and this accounts for why TERP shares have been falling in price in the lead-up to the election. The buyers of those shares will naturally be submitting the shares they buy for stock, so we can be confident that nearly all shareholders will be electing to receive stock in the merger. Since only 49 percent of shares can be exchanged for stock, it’s safe to say that the exchange will be subject to proration, meaning that a shareholder electing to receive stock will in fact receive approximately 50 percent stock and 50 percent cash, with the few shareholders who did not submit their shares receiving cash.
For each two TERP shares submitted for stock, the holder will then receive two special dividends of $1.97 each, plus $9.52 for one of the shares, plus a single TERP share. So two TERP shares will become $13.40 worth of cash plus a single TERP share as the result of the merger.
With one YieldCo (TerraForm Global) removed from the market, and half of TerraForm Power’s previously public shares in Brookfield’s hands, I expect the remaining TERP shares to perform well due to increased demand. The company will also benefit from a world-class sponsor in Brookfield Asset Management. Brookfield Renewable Partners has been steadily raising its annual distribution since before most YieldCos existed, and is currently targeting 5 percent to 9 percent annual distribution growth. The track records of BAM’s large stable of other infrastructure funds should also give confidence to future TERP investors.
If the rumors of a buyout of Abengoa’s stake in Atlantica prove true, I expect this will also be good for Atlantica's current shareholders. Although Atlantica (unlike TERP and GLBL) has spent the last year and a half developing its own internal management so that it does not have to rely on Abengoa, the cost of that management is a drag on results. As part of the Brookfield family, many of these costs can be more efficiently shared with other parts of the Brookfield stable, and Brookfield’s backing should also help lower Atlantica’s borrowing costs.
Brookfield Asset Management has a well-deserved reputation for buying infrastructure assets at a discount, and the 2015 YieldCo bust (and related bankruptcies of SunEdison and Abengoa) has provided Brookfield with opportunities to buy the valuable clean energy assets of TERP, GLBL and (possibly) Atlantica on the cheap. This is good for Brookfield, but also good for investors like myself who bought the three YieldCos' shares even more cheaply in 2015 and 2016.
8point3 and NRG Yield
There are currently two other YieldCos for sale: 8point3 Energy Partners (CAFD) and NRG Yield (NYLD and NYLD/A). I don’t expect that shareholders of these two YieldCos can expect Brookfield to buy them out at anything like current prices.
Brookfield, after all, has that reputation of being a very careful buyer, and can only be expected to buy YieldCos at a steep discount. 8point3 (as I have written elsewhere) is significantly overvalued at the current price of $14.70, and NRG Yield is at close to fair value. I can’t imagine any buyer wanting CAFD at the current price, and if NYLD finds a buyer, it’s unlikely to be Brookfield Asset Management.