Two Canadian pension funds are teaming up to acquire AltaGas Canada Inc., paying more than double the company’s initial public offering price only one year ago.
Public Sector Pension Investment Board, which manages the pensions for federal government workers, and the Alberta Teachers’ Retirement Fund Board are acquiring AltaGas Canada for $33.50 a share in cash, amounting to a total purchase price of $1-billion, or $1.7-billion including debt. The company went public in October, 2018, at $14.50 a share.
AltaGas Canada was spun out from AltaGas Ltd. to help the parent company raise cash and pay back debt after a US$4.5-billion takeover of Washington-based WGL Holdings. The IPO caught many people by surprise because AltaGas had been expected to sell assets to private buyers.
Instead, the gas-distribution and wind-farm assets in British Columbia, Alberta, Nova Scotia and Northwest Territories were spun out into a separate public company. The $239-million deal did not attract strong demand from investors, resulting in a smaller deal size than originally planned, and the shares were priced at a lower level than the marketing range set by the underwriters.
Yet AltaGas Canada has watched its share price rise precipitously in 2019, climbing 57 per cent before the pension funds announced their offer Monday. When the company reported earnings in August, management announced higher capital spending, and said it would be able to fund the expenditures largely with its internal cash flow.
At the same time, AltaGas also boosted its annual dividend by 9.5 per cent, partly owing to a better debt-refinancing rate than expected at the time of its IPO.
With interest rates falling around the world, sending bond yields lower, the values of dividend-stocks have jumped.
Asked about the timing of PSP’s purchase, considering AltaGas Canada was much cheaper one year ago, spokesperson Verena Garofalo said PSP has “studied the company, its assets and its management team for some time, and ultimately were able to complete a transaction yesterday at the end of its strategic review that we are pleased with and fits well with our investment strategy.”
AltaGas has been hindered by its small size relative to large Canadian utilities, but in early October, RBC Dominion Securities analyst Robert Kwan wrote in a note to clients that "if AltaGas Canada were a large cap utility, we believe it might trade at the highest valuation for the entire Canadian peer group.”
He wrote that the company “checks many boxes that utility investors are looking for.” They include a gas distribution business, the potential for growth in its regulated revenues and the ability for the company to fund expansion with its own cash flow.
After the IPO, AltaGas Ltd. held a 36-per-cent stake in AltaGas Canada. RBC calculates that the pension-fund acquisition should deliver $370-million in proceeds to the former parent company, which will improve the company’s balance sheet.
The share price of AltaGas Ltd. has recovered quickly this year after a sharp selloff last year, partly fuelled by a 56-per-cent dividend cut.
The company set out to sell another $1.5-billion to $2-billion in assets in 2019, and in September it surpassed that goal with the sale of a minority interest in the Central Penn pipeline that brought the total value of divestitures this year to $2.2-billion.
At the time of the Central Penn sale, CIBC World Markets analyst Robert Catellier believed more deals could come. “The company has demonstrated limited interest in retaining minority interests, and so the remaining 36 per cent interest in AltaGas Canada could eventually be divested,” he wrote in a note to clients.
With a report from Jeffrey Jones