US fund urges pattern shareholders to reject $6.1bn buyout

On 10th March, shareholders of US renewables developer Pattern Energy Group are set to vote on whether to accept the planned $6.1bn buyout by Canada Pension Plan Investment Board that was agreed in November.

The early indications are that it could be a nail-biter.

Pattern and CPPIB set out why shareholders should accept the deal when they announced it. The deal is worth $26.75 per share and represents a 14.8% premium on Pattern’s closing price on 9th August, which was the final trading day before rumours started about a potential acquisition.

Given the fluctuations in the company’s share price over the last five years, this will prove lucrative to some. They expected the deal to close by mid-2020.

And yet, it doesn’t look like this will be easy. Investment fund manager Water Island Capital, which manages funds that own 4million shares in Pattern Energy Group – a 4.08% stake – said the offer was “woefully inadequate” in a letter to shareholders this week and urged them to reject it.

Valuation consternation

‍Water Island said the valuation “clearly undervalues” the company because the price announced in November did not take into account the rises in renewable energy company share prices that had been seen since August.

Water Island said it believed Pattern’s share price would now be nearer $30 per share without the CPPIB deal, and added that if shareholders rejected the takeover on 10th March then they would be able to achieve a “full and fair value” and without de-railing the potential merger.

And we must say, its figures may prove compelling for shareholders. The fund manager argued that the share prices of the eight firms that Pattern's financial advisor Evercore looked at in its assessment of the deal had risen on average 32.7% from 9th August to 14th February.

These include the US yieldco TerraForm Power (27.1% rise); Canadian yieldco Brookfield Renewable Energy Partners (51.8%); and Atlantica Yield (33.1%). In other words, without the CPPIB deal the share price would have risen even higher. We see why a 14.8% premium for the period looks unimpressive.

In addition, Water Island argued that Evercore’s research, either unintentionally or not, obscured the fact that Pattern’s peers’ share prices rose between the date that Pattern’s share price was locked in for this planned deal (9th August) and when the deal was announced (4th November).

Water Island said the 14.8% premium on the 9th August price would actually have been closer to 2.5%-6.3% if based on what Pattern’s share price would have been expected to be on 4th November had the company performed like its eight peers. It closed by saying that the offer was “woefully inadequate”.

This contrasts with the view of Pattern Energy CEO Mike Garland who, when the deal was announced, said it provided "certain and significant value" for the company's shareholders. This would enable shareholders to "realise the value embedded in the company", alongside their regular dividends.

The looming battle

It is easy to see such an intervention as Water Island simply trying to maximise the value of its own investment. Of course it is, and it makes no secret of it.

However, if we were Pattern Energy shareholders, then this intervention would make us less willing to vote for the deal. Pattern’s share price is now standing at $28 per share, so why would we accept $26.75 on 10th March?

One reason to accept is that there are never guarantees with share prices.

Long-term investors in Pattern Energy will have seen their fair share of ups and downs over the years, and might see this as a good opportunity to crystallise their gain – particularly if they invested close to $18 per share in early 2018.

There is also the political uncertainty around the US wind industry, and the policies that might exist following this year’s presidential election.

But there is, as Water Island suggests, a strong potential upside too as multinational investors including BlackRock and State Street publicly throw their weight behind an ESG agenda that could push Pattern shares higher.

For that reason, we see this as a significant intervention and one that will likely influence shareholders to reject the current offer on 10th March and accept a higher offer later in the year. This potential takeover is far from a done deal.

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