Brookfield Asset Management (NYSE:BAM) will close on its acquisition of a controlling interest and sponsor stake in TerraForm Power (NASDAQ:TERP) next Monday. The deal will give stability to TerraForm Power's finances and provide a steady stream of projects for it to buy, which should allow for dividend growth over the long term.
Yieldco investors want to see into the future
The one thing investors in yieldcos want is stability. They need to know that cash flows are going to pay for debt and dividends, and that the yieldco will be able to grow its dividend long-term. If either of those things falls apart, the yieldco's stock will drop.
TerraForm Power's fall came when investors realized that its sponsor, SunEdison, was going to go bankrupt, which would raise borrowing costs and reduce available cash for a dividend. Once that happened, the yieldco's long-term viability came into question.
8point3 Energy Partners has had a different problem. Its viability isn't in question, but investors haven't been convinced that First Solar or SunPower will be able to supply enough projects for the yieldco to be able to grow its dividend long-term. And the strategy shift the two companies made, from financing and building solar projects to supplying components, reinforced that view. That has led to the low stock price and high dividend yield we see today.
TerraForm Power now has the stability investors want
When Brookfield Asset Management stepped in to buy a controlling interest in TerraForm Power, it also provided the stability investors are looking for. It is bringing a 3,500 MW right-of-first-offer portfolio of renewable energy projects and $500 million of acquisition financing. That gives investors confidence that the company will be able to grow.
A dose of certainty with respect to financing and growth plans would do a lot to help 8point3 Energy Partners as well. Those characteristics are what investors should look for in a buyout of the sponsors. And the upside could be tremendous.
What 8point3 Energy Partners could be worth
In its presentation to investors this summer, TerraForm Power said the Brookfield buyout will be at a $6.6 billion enterprise value with $1.7 billion implied equity value with about $440 million in adjusted EBITDA. Since then, the equity value has risen about $100 million, so at today's stock price, the enterprise value is about $6.7 billion, or 15 times adjusted EBITDA.
If a buyer were able to earn the same multiple from investors in 8point3 Energy Partners, there'd be a lot of upside. The $140 million in cash available for distribution the company is expected to exit this year with would lead to adjusted EBITDA of over $150 million based on 2017 estimates. That would translate to an enterprise value of about $2.3 billion. Given the $712 million in debt, equity would then be about $1.6 billion, or about $20.23 per share.
These are ballpark estimates, but they show what kind of upside 8point3 Energy Partners could have if it gets a new sponsor that can provide the financing and project flow a yieldco needs to have the market's confidence.