Terms of the Deal:
CPN announced that it agreed to be acquired by Energy Capital Partners (ECP), and a consortium of investors led by Access Industries and Canada Pension Plan Investment Board (together the “Buyers”) for $15.25/share in cash leading to an equity valuation of some $5.6B
The transaction has a 105 day “go-shop” period that ends 1 minutes past midnight of Friday, December 1, 2017
If CPN receives a superior bid then it may disband the current deal for a break-up fee of some $65MM, otherwise, should CPN choose to cancel the transaction, for whatever reason, then the break-up fee is $142MM.
The deal is expected to be consummated in 1Q2018.
The current management team is expected to remain in place.
Disappointing selling price:
Potential alternate industry buyers:
Could another PE buyer offer more? Absolutely, in our opinion:
We believe a new bidder would emerge before December 1, 2017: Therefore, we must conclude that there ought to be another PE buyer looking at buying CPN, and we look for a competing bid to emerge before December 1, 2017, possibly in the range of some
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We believe CPN is all but privatized; sticking point would be SB100 || We feel CPN already has a deal or is close. Key sticking point is likely SB100 in CA that mandates 100% renewable for retail sales. If passed, SB100 would relegate CPN’s CA CCGTs relatively useless or would have to run as peakers, which diminishes CPN’s value. Our preliminary valuation suggests that CPN’s equity value would be about $0/share if all of its CCGTs were shut-down in CA, $15-$20/share, if run as SCGTs, and over $30/share with normal operations. Therefore, we believe that CPN will be privatized between $17-$18/share, in-line with our ST-Target. If the deal fails then we agree CPN should focus on debt repayment – $1 debt repay is at least $1 accretion to equity value – and Retail. But as we previously noted, it seems macro-economic situation is improving, and we feel it would accelerate into 2018. Target debt repayment of $2.7B translates into at least some $7.60/share. Operationally, we believe that expansion of Retail through organic means is correct given that major pieces of the business is in place. We agree accelerated closure of coal plants is coming, industry is moving more towards reliance on renewable energy, and even the slow improving natural gas prices are all tailwinds for ST-to-MT gain for CPN. Strategically there’s little to criticize, and it seems CPN has disavowed share buybacks. But, in improving fundamental market and aggressive debt repayment, we believe CPN’s hedging program is too aggressive. In MT-to-LT, we believe importance of heat rate will likely dominate IPP valuations.
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Lately there has been talk about privatizing power companies, including both CPN and NRG, and while we believe that the most rational course for these companies may be to go private – given the lack of “enthusiasm” for these names in the public markets – we are certain that the end result will not be either what the market expects nor what the regulators, politicians and, most of all, what the consumers desire
The assumptions we are making in our analysis are as follows:
Private equity (PE) investors are not unintelligent and will act in their own self-interest
Virtually all of the market (public and private) believe in the theory of “all else being equal”
Market forces move along least resistant path absent paradigm shift, typically externally imposed
As reserve margins dip below 12% market prices become more volatile and margins begin to expand at an accelerated rate
PE investors will be betting on the reduction of debt from internally generated free cash flow and asset sales, supplemented by cost reductions, to increase the equity value of its investments with the option value of changing market dynamics to further boost its rate of return
The first thing that PE investors are likely to do is to make the assumption that the underlying market forces and conditions don’t/can’t/won’t change for the foreseeable future
Based on these underlying assumption, PE investors will be able to figure out which plants they buy will remain profitable, which won’t and which are on the margin
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