Toronto-based Northland's portfolio includes wind farms and solar-power facilities in Canada, Germany, Taiwan and Mexico.JOHNNY C.Y. LAM/The Globe and Mail
Green energy company Northland Power Inc. raised $346-million in a stock sale this month to pay for an acquisition in Colombia, a deal that gave comfort to Canadian CEOs with ambitions outside the borders.
Toronto-based Northland plans to spend $1.05-billion on an electrical distribution network that serves 1.3 million South American customers, adding the utility to a portfolio that already includes wind farms and solar-power facilities in Canada, Germany, Taiwan and Mexico.
To pay for the acquisition, the company sold $346-million of what’s known as subscription receipts – securities that get exchanged for Northland common shares if the deal closes as anticipated, but are refunded to investors if the transaction fails to close. Northland will borrow the rest of the money it needs to buy the Colombian business from a unit of Brookfield Asset Management Inc.
Raising money for an acquisition should have all the drama of ordering a pizza – investment banks do these bought-deal share sales all the time. But in recent months, a string of equity offerings was poorly received.
Banks struggled to sell shares in miner New Gold Inc., broadcaster Corus Entertainment Inc. and cannabis producer Green Organic Dutchman Holdings Ltd. Going into the Northland offering, there was reason to wonder whether public market investors would put their cash behind a relatively aggressive strategic move: Colombia has a reputation for political instability and crime.
The lack of investor appetite for what Corporate Canada is serving up feeds into a larger debate over the relevance of ordinary, retail shareholders in a market that’s increasingly dominated by passive investors, such as index funds, and private sources of capital, including pension plans and asset managers such as Brookfield and Blackstone Group LP.
Investment bankers are wringing their hands over a steady slide in public market offerings, traditionally a highly profitable line of business. Despite strong performance from stock markets that are hitting record highs, the value and volume of equity financing in Canada is dropping steadily, to $27-billion over the past 12 months from $34-billion in the same period last year, and $47-billion in the same period four years ago. Add in a sustained drop in stock-trading commissions, another once-reliable source of profit that’s been disrupted by technology, and it’s easy to argue the dealers’ future doesn’t match their illustrious past.
The banks charged with raising money for Northland Power – CIBC Capital Markets and National Bank Financial led the offering – faced an added challenge. Company founder Jim Temerty sold $862-million of his holding last March as part of an estate-planning exercise, so investors interested in owning the renewable energy play already had an opportunity this year to fill their boots.
Like most successful stock sales, Northland Power got the deal done by selling a growth story. Colombia’s economy is expanding at a 3.5-per-cent annual clip and chief executive officer Mike Crawley pitched investors on an electrical distribution business located near the capital, Bogota, that features "a stable regulatory framework offering an inflation-protected perpetual cash flow profile and serves as a platform for future growth.”
At a time when North American utilities such as Ontario’s Hydro One Ltd. are seeing regulators mandate low-single-digit returns from customers, Northland can expect to earn an 11.5-per-cent annual return on its South American investment, according to analyst Nelson Ng at RBC Dominion Securities Inc.
“In an environment where development returns are compressed, we believe the Colombian regulated utility offers Northland Power an attractive geography and business to deploy capital,” Mr. Ng said.
Investors who stepped up for Northland’s subscription receipts have already made a small gain, as the securities were sold for $24.25 each, and the stock closed Friday at $25.26 on the Toronto Stock Exchange.
Expansion into brave new worlds such as South America is the great challenge for CEOs such as Mr. Crawley. The risks are clear. Yet an international growth plan is also all but essential for public companies based in Canada, a country with a relatively small, slow-growth domestic market.
That’s the reality that shareholders decided to back when they committed cash to Northland Power’s billion-dollar acquisition in Colombia.
Northland Power Inc. (NPI)
Friday close: $25.26, down 19 cents
Andrew Willis