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Water Island Capital, LLC Issues Open Letter to Shareholders of Pattern Energy Group, Inc.

Water Island Capital, LLC (“Water Island”), the manager of investment funds beneficially owning 4,010,772 shares of Pattern Energy Group, Inc. (NASDAQ: PEGI) (“Pattern Energy”) common stock, issued an open letter today to Pattern Energy shareholders detailing reasons for rejecting the proposed acquisition of Pattern Energy by Canada Pension Plan Investment Board (“CPPIB Merger”) at the special meeting of Pattern Energy shareholders scheduled to be held on March 10, 2020 (the “Special Meeting”).

The letter states that Water Island believes that (i) the CPPIB Merger would prevent shareholders from realizing the benefits of the recent surge in environmental, social, and governance (“ESG”) related stocks that has substantially increased renewable energy company valuations; (ii) using traditional comparative valuation methodologies similar to those employed by Evercore in their fairness opinion, Pattern Energy’s share price would exceed $30 per share absent the merger agreement with CPPIB; and (iii) rejection of the CPPIB Merger at the upcoming Special Meeting is unlikely to jeopardize the CPPIB Merger and is the best means available for shareholders to achieve full and fair value.

Moreover, Water Island states that (i) Pattern Energy’s Board of Directors is contractually required to maintain its recommendation in favor of the CPPIB Merger and to present the merger to shareholders for approval at the upcoming Special Meeting; and (ii) Evercore would likely not be able to re-render their fairness opinions based on current valuations.

The full text of the letter follows below:

February 18, 2020

Dear Fellow Pattern Energy Group Shareholders,

On November 4, 2019, Canada Pension Plan Investment Board (“CPPIB”) announced1 an agreement to acquire Pattern Energy Group (“Pattern Energy” or the “Company”) for cash consideration valued at $26.75 per share representing a premium of approximately 14.8% to Pattern Energy’s closing share price on August 9, 2019, the last trading day prior to market rumors regarding a potential acquisition of the Company. Since then, we have witnessed a seismic shift in the valuation of renewable energy companies due to a surge in environmental, social, and governance (“ESG”) related stocks, rendering inadequate the merger consideration and obsolete the fairness opinions provided by Evercore. Water Island Capital, LLC is the beneficial owner of 4,010,772 shares of Pattern Energy or 4.08% of shares outstanding, and our sole interest is to ensure that all shareholders receive full and fair value for their investment in the Company.

Pattern Energy’s shareholders are being asked to approve a transaction on March 10, 2020 that originally offered at best a negligible premium, and now a significant discount, to Pattern Energy’s standalone fair value. It is important to understand that the current merger agreement signed by Pattern Energy and CPPIB contractually requires the Board of Directors of Pattern Energy to maintain its recommendation in favor of the CPPIB Merger and to present the merger to shareholders for approval at the upcoming Special Meeting, forcing Pattern Energy shareholders to take matters into their own hands by voting against the CPPIB Merger. It is equally important to understand that an implicit rejection of the CPPIB Merger on March 10th due to delivery of insufficient proxies in favor of the merger is unlikely to cause the termination of the Merger Agreement, as Pattern Energy would almost certainly continue to adjourn or postpone the Special Meeting, without limitation. Shareholder rejection would unequivocally signal to the boards of both Pattern Energy and CPPIB that Pattern Energy shareholders demand an adequate premium to standalone value in order to approve a merger proposal, and refuse to allow CPPIB to reap the windfall resulting from the recent significant increase in renewable energy company valuations.

We hope that it is as clear to you as it is to us that voting against the CPPIB Merger is a low risk method of pursuing the maximum value that we shareholders deserve for our investment in the shares of Pattern Energy.

Share Price Performance of Comparable Companies

It is clear from the share prices of renewable energy companies that market participants expect them to prosper, based on, we believe, the likelihood of continued positive ESG fund flows, better cost of financing and prolonged lower interest rates. ESG flows in particular have had a staggering effect on valuations for companies with January 2020 in-flows to ESG-related ETFs already exceeding 2018 figures according to Bloomberg (Table 1).

Table 1: Net Fund Flows into U.S. ESG-Related ETFs

($ in millions)

 

2015

 

2016

 

2017

 

2018

 

2019

 

Jan 2020

$ Assets

 

$393

 

$883

 

$1,262

 

$2,017

 

$7,884

 

$3,802

YoY Growth %

 

115%

 

124%

 

43%

 

60%

 

291%

 

Source: Bloomberg

Due to these trends, since August 9, 2019, the last trading day prior to market rumors regarding a potential transaction, shares of the eight comparable companies (“peers”) selected by Evercore in its fairness opinion in the proxy statement have, on average, appreciated in excess of 32.7% (Table 2). Shareholders of Pattern Energy, however, are being offered merger consideration worth only 14.8% more than Pattern Energy’s Unaffected Date closing price of $23.30 (the “Unaffected Price”). If Pattern Energy’s shareholders approve the CPPIB Merger at the Special Meeting, they will forfeit the opportunity to reap the benefit of the recent seismic shift in the value ascribed to renewable energy companies. Thus, the proposed CPPIB Merger would be more aptly described as a take-under, not a takeover.

Table 2: Share Price Performance from August 9, 2019 through February 14, 2020

Share Price (Local Currency)

Aug 9, 2019
(Unaffected)

Feb 14, 2020
(Today)

% Change

U.S. YieldCosa

NextEra Energy Partners LP (NYSE: NEP)

49.24

60.06

22.0%

TerraForm Power Inc. (NASDAQ: TERP)

16.18

20.56

27.1%

Clearway Energy (NYSE: CWEN)

17.40

22.00

26.4%

Canadian YieldCosa

Brookfield Renewable Partners LP (TSX: BEP-U CN)

47.49

72.07

51.8%

Northland Power Inc. (TSX: NPI CN)

25.62

31.55

23.1%

TransAlta Renewables (TSX: RNW CN)

13.14

17.74

35.0%

Innergex Renewable Energy Inc. (TSX: INE CN)

15.19

21.76

43.3%

International YieldCos (Reference Only)a

Atlantica Yield (NASDAQ: AY)

23.47

31.24

33.1%

Average of U.S. YieldCos

25.2%

Average of Canadian YieldCos

38.3%

Average of Evercore Peers

32.7%

Pattern Energy Group, Inc. (NASDAQ: PEGI)

23.30

26.75b

14.8%

(a) Peer set based on Evercore Fairness Opinion - Selected Public Company Trading Analysis

(b) CPPIB Offer

Source: Bloomberg

Valuation of Comparable Companies

The table on page 63 of the definitive proxy statement2 presents peer comparable valuation metrics from Evercore’s fairness opinion. In preparing the fairness opinion, Evercore chose to compare peer valuation multiples on November 1, 2019 with Pattern Energy’s unaffected price on August 9, 2019, which – unintentional or not – obfuscated the already significant appreciation of renewable energy companies since the unaffected date. Extrapolating the valuation appreciation since August 9, 2019 (Table 3) implies that CPPIB’s $26.75 per share cash offer was not a 14.8% premium to Unaffected Price, but more likely a negligible 2.5%-6.3% premium.

Table 3: Premium Analysis as of Fairness Opinion Date (November 1, 2019)

2020E

2020E

Dividend

2020E

CAFD

Yield

EBITDA

Evercore Proxy Peers (U.S. & Canadian)

Average as of Nov 1, 2019 (Fairness Opinion Date)a

14.7x

4.9%

11.4x

Recalculated as of Aug 9, 2019 (Unaffected Date)b

13.8x

5.3%

11.6x

% Change

6.3%

-7.8%

-1.7%

Pattern Energy Group, Inc. ("PEGI")

As of Aug 9, 2019 (Unaffected Date, consensus estimates)

11.5x

7.3%

14.2x

Assumed % Change (based on Proxy Peers)

6.3%

-7.8%

-1.7%

Implied PEGI Multiple as of Nov 1, 2019

12.3x

6.8%

14.0x

Implied Premium on Nov 1, 2019 (Fairness Opinion Date)

Assumed PEGI Multiple

12.3x

6.8%

14.0x

PEGI Consensus 2020 Estimate

$2.07/shr

$1.70/shr

$433MM

Implied PEGI "Unaffected Price" on Nov 1, 2019c

$25.39

$25.15

$26.09

CPPIB Offer

$26.75

$26.75

$26.75

Premium / (Discount) to Unaffected Price

5.4%

6.3%

2.5%

(a) From Evercore Fairness Opinion in definitive proxy statement

(b) Recalculated based on share prices, balance sheets and consensus estimates on Aug 9, 2019

(c) CAFD: 12.3x multiplied by $2.07 CAFD/share = $25.39*; Dividend: $1.70 dividend divided by 6.8% yield = $25.15*; EBITDA: 14x multiplied by $433MM EBITDA less net debt/minority interest of $3.5B divided by 98.2MM shares = $26.09*

* - share prices not exact due to rounding

Source: FactSet - Consensus 2020E Cash Available For Distribution ("CAFD"); Bloomberg - Consensus 2020E Dividend and Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")

Furthermore, if one were to recalculate those same valuation metrics today and compare Pattern Energy to its peers using current market valuations, one can reasonably conclude that the merger consideration no longer values Pattern Energy’s shares at any premium, but at a significant discount (Table 4). We therefore believe it reasonable to conclude that Pattern Energy’s shares are trading today at a price below which they would trade absent the merger agreement with CPPIB.

Table 4: Premium Analysis as of February 14, 2020

2020E

2020E

Dividend

2020E

CAFD

Yield

EBITDA

Evercore Proxy Peers (U.S. & Canadian)

Average as of Feb 14, 2020a

17.8x

4.1%

13.9x

Average as of Aug 9, 2019 (see Table 3 above)

13.8x

5.3%

11.6x

% Change

28.9%

-22.9%

19.8%

Pattern Energy Group, Inc. ("PEGI")

As of Aug 9, 2019 (Unaffected Date, consensus estimates)

11.5x

7.3%

14.2x

Assumed % Change (based on Proxy Peers)

28.9%

-22.9%

19.8%

Implied PEGI Multiple as of Feb 14, 2020

14.9x

5.7%

17.0x

Implied Premium on Feb 14, 2020

Assumed PEGI Multiple

14.9x

5.7%

17.0x

PEGI Consensus 2020 Estimate

$2.07/shr

$1.70/shr

$459MM

Implied PEGI "Unaffected Price" on Feb 14, 2020b

$30.78

$30.07

$43.82

CPPIB Offer

$26.75

$26.75

$26.75

Premium / (Discount) to Unaffected Price

-13.1%

-11.0%

-39.0%

(a) Based on share prices, balance sheets and consensus estimates on Feb 14, 2020

(b) CAFD: 14.9x multiplied by $2.07 CAFD/share = $30.78*; Dividend: $1.70 dividend divided by 5.7% yield = $30.07*; EBITDA: 17x multiplied by $459MM EBITDA less net debt/minority interest of $3.5B divided by 98.2MM shares = $43.82*

* - share prices not exact due to rounding

Source: FactSet - Consensus 2020E Cash Available For Distribution ("CAFD"); Bloomberg - Consensus 2020E Dividend and Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")

Pattern Energy’s Share Price Has Been Anchored Due to the Proposed Merger

We believe that Pattern Energy’s shares have been anchored by the CPPIB Merger while the companies deemed comparable to it by Evercore have appreciated on average over 30% since the August 9, 2019 unaffected date. Had Pattern Energy’s shares increased by a similar 30% its share price would be $30.29, and that is before any takeover premium is considered. Financial media and Wall Street analysts have attributed the recent price appreciation of peers not only to better cost of financing and prolonged lower interest rates, but more importantly to the continued growth in ESG investing and the significant fund flows that come with it. One needs not look further than to read Blackrock’s recent “Letter to CEOs” on sustainable investing3 to recognize that significant ESG fund flows are likely to continue for the foreseeable future.

For the aforesaid reasons, we believe that the CPPIB Merger woefully shortchanges Pattern Energy shareholders. We urge you to preserve your ability to receive full and fair value for your investment in Pattern Energy by voting AGAINST the CPPIB Merger at the upcoming Special Meeting. Send a message to the boards of Pattern Energy and CPPIB that you believe the merger consideration offered by CPPIB to be woefully inadequate.

Sincerely,

Roger P. Foltynowicz

Portfolio Manager

Water Island Capital, LLC

Edward T. Chen

Portfolio Manager

Water Island Capital, LLC

FORWARD-LOOKING STATEMENTS

Certain statements contained in this letter, and the documents referred to in this letter, are “forward-looking statements” and are prospective. These statements may be identified by their use of forward-looking terminology such as the words “expects”, “projects”, “believes”, “anticipates”, “intends” or other similar words. Forward-looking statements are not based on historical facts, but rather on current expectations and projections about future events, and are therefore subject to risks and uncertainties which could cause actual results to differ materially from the future results expressed or implied by the forward-looking statements. These statements are subject to inherent risks and uncertainties surrounding future expectations. Important factors that could cause actual results to differ materially from the expectations set forth in this letter include, among other things, the factors identified under the section entitled “Risk Factors” of Pattern Energy’s special meeting proxy statement and other risk factors contained in Pattern Energy’s Annual Report on Form 10-K for the year ended December 31, 2018. Such forward-looking statements should therefore be construed in light of such factors, and Water Island Capital is under no obligation and expressly disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

About Water Island Capital, LLC

Water Island Capital LLC is a privately-owned asset management firm focused solely on event-driven investment strategies with approximately $2.5 billion under management as of December 31, 2019.

1 Pattern Energy Group, Inc. Press Release, November 4, 2019, https://www.sec.gov/Archives/edgar/data/1561660/000119312519282561/d830360dex992.htm

2 Joint Pattern Energy / CPPIB Proxy Statement / Prospectus, February 4, 2020, https://www.sec.gov/Archives/edgar/data/1561660/000119312520024256/d816812ddefm14a.htm

3 Larry Fink’s 2020 Letter to CEOs, January 14, 2020,https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter

Contacts:

Roger P. Foltynowicz
212-584-2369

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