Algonquin Power and Utilities Corp. AQN-T terminated its deal to acquire Kentucky Power Co. on Monday in a widely anticipated move, removing significant pressure on the balance sheet of the Canadian company as it grapples with higher borrowing costs and an unclear outlook.
Algonquin’s share price rose in early trading but ended the day down almost 1.5 per cent to $11.37 in Toronto.
“In light of the evolving macro environment, our board of directors and management team have determined that continuing with the transaction is not in the best interest of the company,” Arun Banskota, Algonquin’s chief executive officer, said in a statement.
The US$2.6-billion deal to acquire Kentucky Power from American Electric Power Co. Inc. AEP-Q was announced in October, 2021, when borrowing costs were low and Algonquin – a significant renewable-energy producer and regulated electricity provider – was riding a wave of investor confidence that supported debt and share issuance necessary for larger acquisitions.
But rising interest rates and weaker financial performance have weighed on Algonquin for much of the past year.
The share price sank in mid-November after Algonquin reported a third-quarter profit that was significantly below analysts’ expectations and down 27 per cent from the same period in 2021. By Dec. 29, the stock traded as low as $8.70 in Toronto, down more than 40 per cent over the prior six weeks.
In January, Algonquin cut its dividend by 40 per cent and announced that it would sell US$1-billion worth of assets to improve its balance sheet and protect its credit rating.
Though it remained committed to the Kentucky Power acquisition as recently as mid-January, analysts and investors believed that walking away from the deal before the April 26 deadline – particularly if Algonquin could avoid a break fee – would be better for the share price.
As part of the termination agreement, mutually agreed with American Electric Power, Algonquin will not pay the US$65-million break fee that was attached to the original deal.
“Based on our conversations, this move is welcomed and was expected by the market,” Robert Hope, an analyst at Bank of Nova Scotia, said in a note.
Mr. Hope expects the stock can rise to US$9.25 in New York within the next 12 months. The shares fell 1.5 per cent in New York to US$8.50 on Monday.
Algonquin’s balance sheet is stronger now that the company no longer needs to issue debt to finance the deal. Also, it doesn’t face the unattractive prospect of being forced into quick asset sales.
Now, though, investors must figure out what the company will look like without Kentucky Power.
Sean Steuart, an analyst at TD Securities, said that removing Kentucky Power from his profit estimates for Algonquin in 2023 and 2024 had no effect, given that even Algonquin’s management had suggested there would be minimal impact on earnings in the first year of ownership.
What’s more, analysts expect the stock’s valuation will continue to lag peers because of Algonquin’s unclear profit trajectory.
Mr. Steuart noted that Algonquin’s price-to-earnings ratio, based on estimated 2024 earnings, was 15.1 on Monday morning after its impressive rebound this year, or a modest discount to the 16.5-times P/E ratio among North American utilities.
Mr. Hope argued that the stock’s valuation can improve if Algonquin focuses its strategy on standard rate base growth within its utilities operations and contracted renewables projects.
“We believe that larger-scale [deals] and further international investments are off the table for some time,” Mr. Hope said in his note.
Ancora Holdings Group, an activist investor that holds Algonquin shares, issued a release after markets closed encouraging the company to follow through with its plan to shed assets.
“Algonquin should promptly execute these asset sales in order to refocus Algonquin’s portfolio,” Ancora said in its statement, in order to “regain investor confidence and restore the company’s trading multiple.”