Brookfield Renewable Partners (BEP -2.44%) is coming off one of its best years ever as the renewable energy company produced an eye-popping total return of 91% in 2019. While that will be tough to top this year, the company is doing everything in its power to continue to create value for investors. That's leading it to make a bid to acquire the rest of TerraForm Power (TERP) that it doesn't currently own in a deal that would enhance its footprint and boost its per-share results.
Here's a closer look at what this deal would mean for investors in both companies.
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Details on the proposed deal
Brookfield Renewable is offering to acquire the remaining 38% of TerraForm Power that the company and its affiliates don't already own in an all-stock deal valuing those shares at an 11% premium from their closing price last Friday. However, what's noteworthy about the proposed transaction is that Brookfield Renewable, which is one of the largest publicly traded partnerships, isn't offering partnership units. Instead, it plans to exchange shares in a new corporation, Brookfield Renewable Corporation, that it already intended to create later this year. This transaction would help facilitate the formation of that entity, which investors could hold in a retirement account.
What the deal would do for TerraForm Power investors
This transaction would have several benefits for TerraForm Power investors. In addition to the immediate value improvement, they'd own a stake in a much larger, globally diversified company. TerraForm currently focuses on owning wind and solar power assets in North America and Western Europe. Brookfield Renewable, on the other hand, has all that as well as hydroelectric and energy storage operations and a more global footprint, which includes investments in South America and Asia.
Meanwhile, existing TerraForm investors would hold a financially stronger entity since Brookfield Renewable has an investment-grade balance sheet. That makes it a less risky investment, which is important for yield-focused investors.
What the transaction would do for investors in Brookfield Renewable Partners
The proposed deal also has several benefits for existing Brookfield investors. The most important is that it would provide an immediate lift to the company's per-unit results. In addition, it would further expand its portfolio in North America and Western Europe. Finally, it meets the company's targeted investment return and will enhance the upcoming creation of Brookfield Renewable Corporation.
TerraForm would also bolster Brookfield's five-year growth plan. When the company initially laid out its strategy last fall, it expected to invest $4 billion into M&A transactions and development projects over the next five years. That would give it the power to grow its cash flow per unit by 9% to 16% per year through 2024, which it planned to fund via a combination of new debt, retained cash after paying its dividend, preferred equity, and asset sales. However, given the current size of TerraForm Power -- it would invest roughly $1.5 billion into this transaction alone -- it's well on its way toward meeting that goal. Since it's using its much higher equity value to make the deal, though, it still has plenty of financial flexibility to keep making investments. Thus, it could significantly exceed its $4 billion investment target.
A merger that makes sense
TerraForm has yet to formally accept Brookfield's offer, so there is the potential that this deal could fall apart. However, given that Brookfield already controls most of TerraForm's stock, it seems likely that they'll be able to work out an acceptable arrangement, especially given all the consolidation in the renewable energy yieldco sector in recent years. That would be a good outcome for both sets of investors as this transaction would raise Brookfield's scale while providing more power to its growth strategy, increasing its ability to create value for all investors.
