Two of Canada's most aggressive clean-tech players are combining to form a diversified renewable energy powerhouse that will produce electricity from geothermal, hydro and wind projects.
By merging, Magma Energy Corp. and Plutonic Power Corp. will form one of the biggest "pure play" clean-power companies in the country, with increased clout to raise capital and eventually pick up some of the other small players in the industry.
Magma, which has geothermal power plants in Iceland and the United States and exploration sites in Chile and Peru, will essentially take over Plutonic, a company with wind and run-of-river hydroelectric plants already operating in British Columbia, and an option for a solar project in Ontario. Plutonic shareholders will get 2.38 Magna shares for each of their Plutonic shares - or roughly the equivalent of $2.80 a share.
The combined entity, to be known as Alterra Power Corp., will have a market capitalization of close to $600-million, making it a mid-sized player in the power business, but large enough to attract more capital for expansion.
"The power business is all about the cost of capital, and size really does matter," said Magna chief executive officer Ross Beaty, a legendary mining executive who shifted his sights to the renewable sector in 2007. In the clean-energy business "there are a handful of companies of institutional size or quality, and [Alterra]will enter that class," he said.
Mr. Beaty will be the CEO of the new venture, while Plutonic's CEO, Donald McInnes, will become executive vice-chairman, if shareholders approve the deal at meetings to be held in April.
Because the two companies are in different parts of the renewable energy business, savings will come from trimming administration costs. The companies hope to generate savings of about $2.2-million a year.
One big advantage the merged company will have, the executives say, is broad expertise in developing new projects across several renewable sectors - and the ability to stagger a number of new projects through the development pipeline.
"It is nice to have a diversified portfolio of projects that will come on line sequentially over time, said Sean Peasgood, an analyst at Wellington West Capital Markets in Toronto. "Being a larger entity, the new company may be able to lower its cost of capital, making the economics of these projects more attractive."
The merged entity will also have the financial clout to expand through acquisitions. "There's tremendous opportunity all over the world for a company that's creative and entrepreneurial, that has the drive to grow," Mr. McInnes said. The new company has the "heft" and the expertise to move projects in hydro, wind and geothermal from concept to reality "time and time again," he said.
The two companies, which now generate about 366 megawatts of power from operating plants, should easily reach 1,000 MW within five years, Mr. Beaty said.
The new Alterra will be one of only a handful of pure-play renewable energy companies in Canada. Many of this country's green energy assets have been snapped up by bigger energy companies - such as Enbridge Inc. and TransAlta Corp. - keen to diversify from their carbon-based energy assets. Few pure-play firms of any size are left.
MacMurray Whale, an analyst at Cormark Securities Inc., said many small renewable energy companies have seen their valuations depressed over the past year, and that's why some of them have jumped into the arms of larger entities. Magma and Plutonic each had some successes, he said, "but both of them had headwinds, and when that happens, you search for synergy."
Magma stock, which had traded as high as $2 a share 18 months ago, has slipped recently to the $1.20 range, and its shares fell about 8 per cent Monday, closing at $1.12. Plutonic, which traded above $8 three years ago and has slumped since, rose 5 per cent Monday to close at $2.55.
Mr. McInnis said that since the financial meltdown of 2008, "the shine is off clean energy," but he is convinced that a pure-play green-energy company such as Alterra will eventually get an enhanced stock valuation again, particularly if oil prices stay high.