Northland Power Income Fund sweetened the terms of a planned takeover on Tuesday, but institutional investors remain unimpressed and plan to vote against the deal.
Northland , which runs six power plants, has faced strong opposition to a planned $370-million purchase of a private company controlled by the trust's chairman James Temerty ever since the takeover was announced back in April.
The fight is over price: Institutions and analyst say Northland is overpaying for Mr. Temerty's company, which is developing a number of generating projects and called Northland Power Inc., or NPI. The heart of the deal would see Northland pay 41.9 million units for NPI, which would leave Mr. Temerty with 39 per cent of the income trust, and senior managers with another 6 per cent. Northland has a $604-million market capitalization.
In the face of lobbying from unitholders, Northland announced Tuesday that it will make the price paid for NPI partly conditional on the company's future profits. Northland said it will reduce the number of units it pays for NPI by up to 18 per cent if the private company's projects end up contributing less than $75-million of profit to the income trust in two year's time.
This amendment hasn't swayed money managers who hold Northland units. Sources say institutional shareholders holding about 25 per cent of the votes still plan to vote against the acquisition.
While substantial, that's not enough votes to kill the deal: Northland needs 66/6 per cent approval from unitholders to go forward with the NPI purchase. Individual shareholders own the majority of Northland units and control the fate of the NPI purchase. Unitholders have until Thursday to vote by proxy on the deal, and the fate of the takeover will be determined at Northland's annual meeting on June 22.
Here's why Northland's institutional unit holders continue to see the NPI purchase as being too rich: BMO Nesbitt Burns analyst Michael McGowan crunched the numbers on this takeover, working in the amended terms for the deal that see Northland cut the payment for NPI, and said the takeover is still pitched at a premium to publicly-traded peers.
"Assuming this consideration is not paid, we estimate that the valuation of the transaction would decline to approximately 9.4-10.1 times 2011 estimated enterprise value to EBITDA, versus an implied valuation of 10.4-11.0 times 2011 estimated enterprise value to EBITDA for the original transaction," Mr. McGowan said in a report Tuesday.
"While the potential reduction in consideration can be seen as an improvement, most of the other income trusts and limited partnerships in our coverage universe that own gas-fired generation are trading at forward enterprise value to EBITDA multiples of below 9.0 times," said Mr. McGowan.
Now, Northland and NPI executives don't see things that way.
"The amendment responds to concerns about the value of NPI's development activities that have been raised by certain institutional investors," said John Brace, CEO at NPI and the fund's manager, in a press release on Tuesday. "It transfers the majority of the development risk to the sellers.
"The sellers are willing to assume that risk because they are confident that the NPI development pipeline will demonstrate its worth in the next two years," said Mr. Brace. He pointed out that RiskMetrics Group recommended that Northland unitholders vote in favour of the takeover.
Northland had an independent investment bank - Crosbie & Co. - sign off on the terms of the NPI takeover back in April.
Andrew Willis