Shares of Teekay Corporation (NYSE: TK) and Teekay Offshore Partners (NYSE: TOO) are up 12.6% and 7.4%, respectively, as of 11:15 a.m. EDT today. The jump comes after Teekay announced a transaction with Brookfield Business Partners LP (NYSE: BBU) for a stake in Teekay Offshore Partners.
It's no secret that Teekay Offshore Partners has been struggling for some time. While the company has a decent suite of assets with long-term contracts in place for its fleet of floating production, storage, and offloading (FPSO) and shuttle tanker vessels, it has struggled to access financing to pay for its newbuilds. As a result, its leverage was way too high for any company to have rightfully.
This deal between Teekay and Brookfield will help to ease this concern, but it is a rather complex one. Here is the gist of it.
- Brookfield and Teekay will invest $610 million and $30 million, respectively, for newly issued common shares in Teekay Offshore Partners. Brookfield will also take ownership of a $200 million loan to Teekay Offshore Partners currently held by Teekay Corp.
- The cash from those newly issued shares will be used to retire all preferred shares in the company.
- Brookfield will now own 60% of Teekay Offshore Partners' common units and will have a 49% stake in Teekay Offshore GP, which has incentive distribution rights over the limited partnership.
In conjunction with these financial deals, Teekay Offshore partners will reduce its current payout all the way to $0.01 per share. Part of the reason is to accommodate the share dilution, and the other is to help finance the rest of Teekay Offshore's growth pipeline.
No investor wants to see their payout get cut, but this is a good move for Teekay Offshore overall. It provides much-needed financing right now and provides it a pipeline for growth once those newbuilds are finished. That said, the amount of dilution that will come with the deal will likely slow the per-unit distribution growth over time. The company may be in a better financial position, but it may not be the best place to invest right now.