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TerraForm Power Inc's Most Brilliant Moves in 2017 So Far

By Travis Hoium – Jul 8, 2017 at 9:16AM

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Finding a buyer for TerraForm Power was half the battle, but leaving investors further upside may ultimately be the more brilliant move.

When 2017 began, investors didn't know what to expect from TerraForm Power Inc (TERP). The company was nearly a year behind in reporting earnings, and sponsor SunEdison's creditors were looking for a buyer for TerraForm Power

Brookfield Asset Management (BN 3.04%) agreed to buy 51% of TerraForm Power after months of negotiations. And investors still have some upside if the company can make a recovery under Brookfield's leadership. 

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Image source: Getty Images.

Get a deal done

The most important move TerraForm Power could have made in 2017 was getting an acquisition agreement from a buyer. SunEdison's sponsorship and ownership of a controlling interest made a deal complicated, but Brookfield emerged as the most interested in bringing the yieldco in-house. As you can see in the chart below, the buyout price wasn't what investors were hoping for coming into the year, but it was difficult to gauge what a buyout might look like without quarterly filings. 

TERP Chart

TERP data by YCharts.

The risk in not getting a deal done was that TerraForm Power could have potentially gone bankrupt. It is technically in default under most of its non-recourse project debt, and not having a sponsor could make it hard to refinance debt. Getting a merger agreement was the biggest win the company could have gotten in 2017. 

Don't give away everything in a fire sale

The icing on the cake is that investors still have upside if Brookfield can get TerraForm Power back on its feet. A full sale may have netted just the $11.46 per share in cash Brookfield is offering. As it stands, investors who opt for a combination of cash and stock will get 0.53 shares of the new TerraForm Power. If the debt can be refinanced at a lower rate or investors push the stock high enough so projects can be purchased accretively, we could see a growing dividend once again and the stock could go up further from here. 

Shares are already trading above $12 per share, so investors think there's further upside for TerraForm Power once Brookfield takes control. And not giving away complete control of the yieldco was a decision that investors could look back on as a brilliant move over the long term. 

TerraForm Power could be a high-dividend stock

Management's guidance of cash available for distribution of around $120 million would imply a 7.1% dividend yield given the Brookfield buyout's implied $1.7 billion equity valuation. The hope for investors is that the dividend payout is the baseline for a recovery, and if Brookfield can lower borrowing costs and inspire the market's confidence to push the stock higher, we could see dividend growth in the future. This could once again be a yieldco that leads the U.S. market, and investors still have upside given TerraForm Power's decision not to sell the entire company to Brookfield Asset Management.

Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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