Rumors started swirling around Pattern Energy (NASDAQ:PEGI) in August that potential buyers had approached it with takeover offers. Those reports, which the company subsequently confirmed, sent shares of the renewable-energy company soaring. They also led the company to form a special committee to review the bids it received.
In the end, the company settled on an all-cash offer from the Canada Pension Plan Investment Board (CPPIB). As a result, Pattern Energy will soon cease to exist as an income option for investors. It's a somewhat disappointing outcome for long-term investors who were hoping to earn a renewable income stream for years to come.
Details on the deal
CPPIB has agreed to pay $26.75 per share for Pattern Energy, valuing the company at $6.1 billion. That deal price is 14.8% above where Pattern Energy traded the day before market rumors of a potential deal sent its shares soaring. However, that price is about 6% below its 52-week high and 3% less than its closing price the day before the deal's announcement. It's also more than 21% below its all-time high, which it hit shortly after its IPO in 2013.
However, the company's CEO, Mike Garland, noted that the deal "provides certain and significant value for Pattern Energy shareholders with an all-cash transaction at a very attractive stock price." Meanwhile, board Chair Alan Batkin stated that the company "undertook a robust process that we believe culminated in a transaction that delivers value to shareholders." He further noted:
The special committee reviewed multiple bids as part of a thorough process that involved multiple parties and evaluated the transaction against the company's standalone prospects, performance, and outlook relative to historic trading multiples and yields. Based on this review and in light of the transaction structure, the special committee unanimously determined that this transaction is in the best interest of the company's shareholders and recommended it to the full Pattern Energy board, which also determined that this transaction is advisable and in the best interests of the Ccmpany's shareholders. The transaction delivers significant, immediate, and certain value to the company's shareholders.
In other words, it was the best offer it received and represented better value than the company believed it could have delivered on a standalone basis.
Not the desired end most investors wanted to see
While investors will receive a sizable cash payout for their Pattern Energy stock, the deal price is a bit of a disappointment. That's because it's less than investors could have received by selling on the open market last week. Furthermore, the company had two other alternatives that could potentially have enabled investors to earn more over the long term.
First, the company could have continued with its standalone strategy. It was in the middle of a two-year plan to improve the long-term sustainability of its dividend. Pattern Energy had been working toward the aim of growing its cash flow at a 10% compound annual rate through 2020, which would improve its dividend payout ratio from 99% last year to 80% by the end of next year. The company had made excellent progress on this plan, including recently making a needle-moving acquisition that should have provided most of the power it needed to deliver its planned growth. That would have potentially enabled the company to start growing its 6.3%-yielding dividend again after next year, which could have further enriched its investors over the long term.
Meanwhile, Pattern Energy could have considered an all-stock merger with another renewable-energy company. According to reports, Brookfield Asset Management (NYSE:BAM) floated the idea of merging Pattern with TerraForm Power (NASDAQ:TERP), which it controls. This deal would have created a much larger-scale renewable power producer that would have reduced the combined company's costs. That could have enabled the merged TerraForm Power/Pattern Energy to grow their dividend at a faster pace in the future, which could have created more value for investors over the long-term.
Instead of opting for either of those options, Pattern Energy chose the certainty of CPPIB's all-cash offer. In exchange, investors will hand off all the risks as well as the upside potential to CPPIB.
What should investors do now?
Given that Pattern Energy seems to have wanted certainty above all else, there's a low probability that this deal will fall through, especially since CPPIB isn't a strategic buyer but a cash-rich financial investor. As a result, investors will receive cash when the deal closes, which should happen by the second quarter of next year. While they have many options for this money, one that they should consider is reinvesting it into TerraForm. It currently pays a 4.7%-yielding dividend that it expects to grow by 5% to 8% per year through at least 2022. That makes it an excellent option for investors who want a growing income stream powered by renewable energy.