Algonquin looks abroad for deals

Signs joint venture with Abengoa SA

Think big — but prudently.

That’s one interpretation to the first off-the-continent move by Algonquin Power & Utilities Corp. to form a joint venture with Abengoa SA, a Spanish-based company, for the goal of seeking out clean energy and water infrastructure opportunities around the world.

While there are no assets in the joint venture at present, about US$300 million of possibilities have been identified.

Algonquin’s move came with a second string: it will purchase a 25-cent-stake in Atlantica Yield PLC from Abengoa for at least US$608 million. After that, Abengoa will own a 16.5-per-cent stake in Atlantica — a company with operations in the Americas, Europe and Africa. Algonquin has the right of first refusal on that 16.5-per-cent stake.

Given Abengoa’s recent financial worries — one year back some of its non-Spanish entities went through bankruptcy, though the parent did not — analysts believe act Algonquin will more than likely acquire the stake.

Analysts — according to Bloomberg the company has eight buy recommendations and three holds — liked the transaction that doesn’t as a real surprise given there was talk of a possible link earlier this year. Such talk of international expansion was confirmed on Algonquin’s most recent conference call.

First, and despite the entry price, it is a toe-dip in another part of the world. (Algonquin’s market cap is about $5 billion.) In the words of one analyst: “It’s a smart and low-risk way of getting into international markets.”

Secondly it has chosen to expand internationally via a joint venture. A joint venture allows Algonquin to ringfence its other assets, which until this deal were all in North America. Such a structure “mitigates risk,” noted one analyst.

Thirdly, Algonquin — whose business is split three-quarters, one-quarter between regulated and unregulated — is not the first power company to venture into Europe. Indeed it is following the script, laid down by Boralex, which in 2009, established a European partnership with Cube Infrastructure Fund, part of a plan to “accelerate” the development of Boralex’s renewable energy segment in Europe. Six years later that partnership was wound up.

Others have done it slightly differently. In the summer of 2013, Northland Power agreed to acquire a majority stake in a North Sea offshore wind project. Since then it has acquired more operations and is “currently developing and building European renewable energy projects totalling over $3 billion.”

The one negative is that in trading Thursday, the stock was down slightly, which may reflect the $500 million of equity that was placed. Trading was high, with 14.6 million shares changing hands, but the market close was above the $13.25 price charged for the 37.8 million shares that were issued.

LOOKING FOR THE BOTTOM

Maybe next week will be better.

That’s what some shareholders of Roots Corp. must be thinking after what has been a brutal week: the stock that cost them $12 in the middle of last week can now be sold for $8.92 — a 25-per-cent drop.

Of course the paper loss would be worse had the underwriters been able to sell the shares at $16, the high point of the marketing range, when the issue was launched. Clearly $12 was too high, because the shares, which all came from a secondary offering with the company getting none of the proceeds, never traded above issue price.

The underwriting agreement shows that TD Securities and Credit Suisse had the largest chunk of the deal: both had a 22.7-per-cent stake. Seven other dealers signed on for the rest.

For shareholders there is one consolation: the shares have traded lower than Thursday’s close of $8.92. On an intraday basis they hit $8.55 on Wednesday.

ALLOWS ALGONQUIN TO RING-FENCE ITS OTHER ASSETS.