A group of U.S. activist investors has clarified its opposition to Brookfield Renewable Partners LP’s proposed investment in TransAlta Corp., arguing that the complex agreement sidelines potentially better transactions and undervalues the power generator’s hydroelectric assets.
“We call on TransAlta’s CEO, who has enthusiastically promoted the deal’s benefits, to be more forthcoming about its rationale and the process undertaken to ensure TransAlta achieves the best outcome for all shareholders,” Nathaniel August, president and portfolio manager of Mangrove Partners, said in a statement released with Bluescape Energy Partners.
The renewed opposition follows Monday’s announcement by TransAlta that it had agreed to a $750-million investment from Brookfield Renewable Partners to help the Calgary-based company accelerate its transition from coal-fired plants to cleaner hydroelectric assets.
As part of the deal, Brookfield will buy newly issued TransAlta exchangeable debentures and preferred shares that will be exchangeable, in 2024, for up to 49 per cent of TransAlta’s Alberta hydro assets, giving it a significant ownership stake.
As well, Brookfield will add two of its executives, Harry Goldgut and Richard Legault, to TransAlta’s board of directors and said it will buy more common shares until its ownership rises to 9 per cent, up from nearly 5 per cent currently.
TransAlta’s chief executive officer, Dawn Farrell, has championed the deal as an endorsement of the company’s value, which had been shaken over the previous decade by quarterly losses, credit downgrades, rising debt ratios and uncertainty over its transition away from coal-fired plants. RBC Global Asset Management, TransAlta’s largest shareholder, also stated that it supports the move.
However, Mangrove Partners, Bluescape Energy Partners and Cove Key Management LP rejected the deal earlier this week for leaning too heavily in favour of Brookfield, and said they would nominate five directors to TransAlta’s 10-member board with the aim of being able to terminate the investment.
On Friday, the investors – which own a combined 10.1 per cent of TransAlta’s outstanding shares – issued a statement calling on TransAlta to release more details on its decision to side with Brookfield, which it called a “rushed process.”
Spokespersons at TransAlta and Brookfield declined to comment.
“Let me be clear: Our goal is not to stop this transaction, but rather to ensure that the company retains the option to pursue or renegotiate a better one," Mangrove Partners’ Mr. August said.
In their statement, the activist investors said they wanted to know the extent to which TransAlta conducted a process to determine the fair market value for TransAlta’s hydroelectric assets.
They implied that the deal undervalues the assets. According to TransAlta, Brookfield has the option to buy the hydroelectric assets at a value of 13 times their future three-year average EBITDA (earnings before interest, taxes, depreciation and amortization).
But the activist investors believe that a Brookfield conference call in October suggested that hydroelectric assets typically trade at richer valuations, implying that Brookfield is getting a sweetheart deal.
The investors also want to know why Brookfield’s debenture and preferred-stock deal comes with 7-per-cent coupons that are larger than the coupons on TransAlta’s unsecured debt.
And they want to know why Brookfield is being granted two board seats.
“Until the company provides more details, we believe all shareholders have reason to question the financial costs of this deal, as well as its potential to further entrench and protect the current TransAlta board from being accountable to its shareholders," John Wilder, executive chairman of Bluescape, said in the statement.
The agreement between Brookfield and TransAlta follows a rally in TransAlta’s share price this year, which lifted the price to a three-and-a-half year high of $10.04 on Thursday. The stock is up 74 per cent year-to-date.
For its part, Brookfield Renewable Resources – a publicly traded division of Brookfield Asset Management Inc. – has been expanding at a brisk clip. Over the past five years, it has doubled the size of its hydroelectric assets, which account for 76 per cent of its portfolio.
David Berman