Northland Power Income Fund has run into strong but reasoned opposition to the planned $372-million purchase of its founder's private management company.
Northland, which runs six power plants, announced Friday that it wants to buy in the external management company run and owned by chairman James Temerty. The purchase makes strategic sense. It's the price that's raising hackles.
If Northland unit holders approve the proposed swap, Mr. Temerty ends up with 39 per cent of the trust and management would own another 6 per cent. That's at the mid point of the valuation on this buy in suggested by the advisor to Northland's trustees, Crosbie & Co.
Scotia Capital analyst Tony Courtright took a long look at the numbers and the financial realities of both the trust and the private, external manager in a report on Monday. He endorsed the skills of management of Northland and said: "Our only concern is whether the proposed purchase price sufficiently justifies the marginal benefit to unit holders."
Using data supplied by Northland and Crosbie & Co., and a $372-million value on the deal, Mr. Courtright concluded: "We estimate consideration of about 39 million Northland units would reflect the appropriate value of [the external manager's]assets. Instead, under this proposal, Northland is expected to issue 41.9M units as part of its total consideration."
Then Mr. Courtright looked beyond the numbers, and focused on what might be motivating the sale of an external management company that faces serious costs in bringing those developmental power plants on line. Remember, we are in the midst of a credit crunch that's made financing expensive, and difficult to find.
"The timing and motivation for this transaction are being driven by [the external manager's]need for capital to inject into its two major construction projects," said the Scotia Capital analyst.
"While we applaud the concept behind this proposed merger, we question if this is the best price at which Northland unit holders can achieve the same result," said Mr. Courtright. "Given [the external manager's]need for capital, we wonder what consequences would result if unit holders rejected [the]current offer."
TD Securities looked at this exchange and labeled it a "relatively high overall purchase multiple," while acknowledging Mr. Temerty's strong track record.
In step with peers, TD Securities analyst Bill Cabel questioned why Northland was paying a premium price for power projects in Mr. Temerty's private company that are still at the development stage. Trusts are valued on their cash distributions, and developmental projects don't spin off cash.
Want to hear from one more critic? This is what Robert Kwan at RBC Dominion Securities had to say about the purchase price that Northland's trustees agreed to, but unit holders must still approve. He said: "We do not believe that investors should ascribe meaningful value to development projects in the current market environment."
RBC Dominion's analyst compared Northland to other power companies and concluded: "We believe that other publicly-traded power investments are trading at prices that reflect no value for development assets."
Andrew Willis