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.
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.
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.