TerraForm Power (TERP) hasn't won the affection of investors since going public a few years ago, given that its stock is down nearly 60% over that timeframe. That said, the plunge isn't entirely its fault: The company's now bankrupt parent used it as a vehicle to rapidly expand, which resulted in it taking on a mountain of debt.
However, TerraForm Power is about to gain a new parent when alternative asset manager Brookfield Asset Management (BN 0.40%) takes control later this year. I love that new relationship, because it should help TerraForm Power get back on solid ground -- Brookfield is providing TerraForm with direct financial and operational support to enable it to grow. Furthermore, Brookfield has a knack for creating value for investors, including helping its other renewable-power vehicle Brookfield Renewable Partners (BEP) deliver a 14% compound annualized return since 2011.
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Details on the deal
This past March, Brookfield Asset Management announced that it would become a cornerstone investor in TerraForm Power by acquiring a 51% stake in the company with the help of Brookfield Renewable Partners, which is injecting $500 million into that deal as well as privatizing TerraForm Global (NASDAQ: GLBL). The transaction will provide several benefits to TerraForm Power, including management expertise in the renewable sector, as well as helping to improve its financial strength so it can reduce its cost of capital to a more reasonable level.
To accelerate its transformation, Brookfield will provide TerraForm Power with the right of first refusal (ROFR) for a 3,500 MW portfolio of wind and solar plants, providing clear visibility into future growth. In addition, Brookfield agreed to give it a $500 million sponsor equity line to support accretive growth transactions, such as acquisitions and organic growth projects. This agreement will enable TerraForm Power to shore up its financial situation, so it can eventually reinstate a sustainable payout to investors.
A premier wind and solar powerhouse in the making
Brookfield's aim with this transaction is to transform TerraForm Power into a top-tier wind and solar energy company with operations focused on North America and Western Europe. It intends to steadily deleverage TerraForm Power so that it ultimately achieves an investment-grade credit rating. In the interim, the large ROFR inventory and $500 million equity line will enable the company to continue expanding until it can access outside capital on its own to finance growth.
The goal behind this arrangement is for TerraForm Power to become more like Brookfield Renewable Partners; the latter is one of the largest independent hydro operators in the world and offers investors a compelling current yield of 6.2%, with plans to increase its payout by an annual rate of 5% to 9% over the long term. The only difference is that TerraForm Power will focus on wind and solar while Brookfield Renewable will concentrate on hydro. While it will likely take a while before TerraForm Power can get to the scale where it can generate that kind of predictable income and growth, it's more likely that it can get there with Brookfield's help.
The second act should be better than the first
Brookfield Asset Management has a history of turning around struggling businesses and generating outsized returns for investors, which is why I love that it's taking control of TerraForm Power. While the ride could be bumpy as Brookfield works its magic, I firmly believe that it will transform TerraForm Power into a financially sound company that can eventually deliver solid returns for investors, powered by a compelling dividend.
