The latest income fund takeover promises to kick off a fight, as power company Boralex takes a run at Boralex Power Income Fund with what institutional holders in the trust view as a stink bid.
Montreal-based Boralex, owner of 29 power stations, is attempting to take over a trust that shares its name, and features the parent company as a 23 per cent equity holder. Boralex Power Income Fund owns 10 power stations in Quebec and the U.S., and both companies are active in the wind, hydroelectric and thermal power, trendy sectors that are attracting premium valuations among power companies.
Takeover plays are common in the trust space, ahead of an onerous tax regime for these companies in 2011, and trust unit holders have forced better terms out of buyers in recent buyouts.
The battle in this deal is over the currency that Boralex is offering: The company wants to purchase the trust by issuing convertible debentures to unitholders in the trust, and it values this paper at $5 a unit.
Boralex is offering debentures that pay a lousy rate - 6.25 per cent - and a sky-high conversion premium, according to executives at Stanton Asset Management, a major holder of the trust.
With a conversion price of $17, the debentures flip into Boralex shares at a 70 per cent premium to where the stock was trading in the 30 days prior to the offer for the trust. Stanton chief investment officer Connor O’Brien pointed out that the convertible debt is poorly priced compared to similar debentures issued by other companies, and therefore likely to decline in price after it’s issued and starts trading.
In what will likely be a telling point for the fund’s income-oriented owners, Mr. O’Brien calculates that unit holders will receive approximately 50 per cent less after-tax income if they end up holding the convertible bonds, rather that trust units.
The income trust has also promised to pay Boralex a $6.8-million break fee if the takeover does not close for reasons that include a superior bid from a rival company. Think about this fee: If the fund gets a better offer, Boralex already stands to gain as a major owner.
Analysts who follow Boralex are bullish on the company in part because it could snap up the trust, and its power plants, for a bargain price.
Versant Partners analyst Massimo Fiore published a report Wednesday that said the buyers “could acquire Boralex Power Income Fund at a discount to what we believe it to be worth.”
“We believe that the price offered and the financing arrangement to pay for the acquisition (non dilutive convertible debt) for operating assets focused on hydro power could create significant shareholder value,” Mr. Fiore said.
Looking that the deal another way, RBC Dominion Securities published an report on Boralex on Wednesday that said its analyst “sees some uncertainty regarding the transaction due to unitholder concerns about the form of consideration being offered.”
Independent trustees at Boralex Power Income Fund hired BMO Nesbitt Burns to give a fairness opinion on the offer, and the investment bank valued units in the range of $4.50 to $5.05 each. CIBC World Markets and law firm Fasken Martineau DuMoulin advised the income trust and its special committee on this transaction.
Across the table, TD Securities is working for Boralex, with Fraser Milner Casgrain as the buyer’s legal advisor. Boralex is expected to mail a formal takeover offer to the trust's unitholders by May 21.
As part of a campaign to sell this takeover to Boralex shareholders, rather than unitholders in the trust, Boralex chief executive officer Patrick Lemaire said in a press release that combining the two companies “will provide Boralex with significant benefits through the diversification of its assets and their geographical location.”
“From a financial perspective, the acquisition of the Fund is immediately accretive to operating cash flow per share,” said Mr. Lemaire.
