Instead of being cryptic about the real reason for their merger, the heads of Magma Energy Corp. and Plutonic Power Corp. have come right out and said it: scale.
"The power business is all about the cost of capital and size really does matter," said Ross Beaty, Magma's head, on a conference call Monday.
The combined balance sheets will particularly benefit Plutonic, which up until last week only had one operating project. "The utility industry is difficult. We're dealing with very capital intensive projects," said Plutonic's head Donald McInnes.
Put together, the two companies, who will go by Alterra Power, will have enterprise value of $1-billion and can help fund Plutonic's capital needs until it generates free cash flow later this year.
The deal is also about expansion for Mr. Beaty, who readily admits the geothermal sector is too small for intense growth. "I have found few opportunities for growth apart from the projects were now hold in our pipeline," he said. Together, "we won't be constrained to small industry like geothermal. We'll have much, much more room to grow."
Unlike Magma, which is currently focused on geothermal energy, Alterra will have assets in three of the four renewable energy sectors (geothermal, wind and hydroelectric, missing only solar).
With the bigger capital pool the company wants to buy more assets, but said it hopes to abstain from raising equity for quite some time because they will get some capital from the Icelandic geothermal project. Mr. Beaty also said its U.S. listing is off the rails for now because the merger takes precedence, but he hopes to return to it in the second half of the year.
Until now, Magma focused on geothermal projects in Nevada, Peru, Chile and Iceland while Plutonic's main assets were the Toba Montrose hydroelectric project and the Dokie wind project that went into commercial production just last week.
Under the terms of the deal, each Plutonic shareholder will receive 2.38 shares of Magma in a deal worth $575-million.
Raymond James, who led Magma's IPO, was the acquirer's financial adviser while Borden Ladner Gervais offered legal advice. Cormark Securities and Miller Thomson advised Plutonic.