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Report on Business Activist investors demand TransAlta hold a vote on Brookfield deal

President and CEO of TransAlta Dawn Farrell in her corporate headquarters in Calgary, Alberta, April 5, 2019.

Todd Korol/The Globe and Mail

Activist investors want to force power generator TransAlta Corp. to postpone its annual shareholders’ meeting and are demanding the company hold a vote on its $750-million deal with Brookfield Renewable Partners LP, which the dissidents say was thrown together hastily.

In what has become a heated scrap over corporate direction, Mangrove Partners has applied to the Ontario and Alberta securities commissions, seeking a vote on the transaction among TransAlta shareholders who are not connected with Brookfield or other deal insiders.

Mangrove and its U.S. allies, Bluescape Energy Partners LLC and Cove Key Management LP, own more than 10 per cent of TransAlta’s shares. They complain the deal, announced on March 25, lowballs the value of TransAlta’s hydroelectric assets and prevents the potential for better deals. Mangrove wants the meeting pushed back to at least June 1, saying it would allow TransAlta to provide more details about its arrangement with Brookfield, a long-time investor in the Calgary-based company.

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“Entering into an agreement with a shareholder having a toe-hold shareholding under which the company agrees to sell that shareholder a 49-per-cent minority interest in assets critical to the company, and encumbering those assets with a right of first refusal, in the face of a looming proxy fight is clearly unfair and abusive to both shareholders and the integrity of the capital markets,” Mangrove said in its application.

Under the deal, TransAlta aims to use $350-million to speed its move away from coal to gas-fired power, and another $250-million for a major share buyback. TransAlta will use the rest for other projects. Brookfield is buying new TransAlta convertible debt and preferred stock. Each will pay 7-per-cent annual interest that will be exchangeable, in 2024, into up to 49 per cent of TransAlta’s Alberta hydro assets, based on their profitability at the time.

The deal does not require a vote, although shareholders must approve two Brookfield board nominees, Harry Goldgut and Richard Legault, at the meeting, scheduled for April 26. TransAlta is also nominating Robert Flexon, former chief executive of U.S. power producer Dynegy Inc., as a director.

In a recent interview, TransAlta CEO Dawn Farrell told The Globe and Mail that the activists should be happy with the arrangement because it accelerates the company’s main objectives – reducing debt, speeding up the shift to gas and rewarding shareholders that have become impatient with the lagging stock price.

But in an affidavit supporting the application, Mangrove’s founder, Nathaniel August, detailed numerous discussions with Ms. Farrell and TransAlta chairman Gordon Giffin in the lead-up to the announcement of the Brookfield transaction. Its group comprises power-industry veterans who have done numerous deals.

John Wilder, Bluescape’s executive chairman, is the former CEO of TXU Corp., purchased by Kohlberg Kravis Roberts & Co. and Texas Pacific Group for US$32-billion in 2007. Mr. August said Ms. Farrell herself called Mr. Wilder “the Michael Jordan of merchant power.”

Mr. August said TransAlta initially appeared open to its ideas for adding board members and establishing a “business review committee,” which would make recommendations to the board on such things as allocating capital, cutting costs and selling assets. But he said talks broke down in the days before the Brookfield deal was announced.

Mangrove describes TransAlta’s hydro assets as its crown jewels, and said they could fetch as much as 20 times annual earnings before interest, taxes, depreciation and amortization, rather than the 13 times they are being afforded by Brookfield.

Mr. Giffin called the application “inappropriate, unwarranted and without merit."

“It is an attempt to circumvent the rights of our other shareholders through a misuse of the Canadian regulatory process," he said in a statement. "We are moving forward with our strategic partnership with Brookfield and the business of creating value for the company’s shareholders.”

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