Brookfield Asset Management (BN -1.10%) already controls one of the largest portfolios of renewable energy projects in the world, but it's making moves to consolidate that power. On Monday, Brookfield Renewable Partners (BEP 1.63%) made a $4 billion offer for TerraForm Power (TERP).
The offer to buy out TerraForm Power isn't binding and may not go through as planned, but it makes sense for both sides right now. And it would lead to a massive renewable energy company with 22 gigawatts (GW) of power-generating capacity around the world. Here's what you need to know about the deal.
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What's going on with this buyout?
Brookfield Renewable Partners is offering 0.36 shares for each share of TerraForm Power in a buyout. Through the partnership and its affiliates through Brookfield Asset Management, Brookfield already controls 62% of TerraForm Power, so the two are already connected. But combining forces will allow the companies to operate more efficiently and share in Brookfield Asset Management's pool of assets. Those assets would drop down to the partnership, which is ultimately where growth comes from.
There's a forward-looking element to this buyout to keep both companies stable as well. In the last three months (before the buyout was announced), Brookfield Asset Management's stock was up 16% and TerraForm Power's was down 8%. As a result of TerraForm's drop, the stock was yielding 5.2%, a level that will make it hard to use stock to acquire assets, especially if the stock keeps dropping.
If the market were to lose confidence in TerraForm Power, it could go into a downward spiral, so this is something of a bailout before that happens. And as owners of TerraForm Power, Brookfield Asset Management and Brookfield Renewable Partners both have an incentive to not let the stock fall too far.
Why a buyout makes sense now
The two renewable energy industries that are growing most quickly today are wind and solar, which is all TerraForm Power does. On the other hand, 74% of Brookfield Renewable Partners' assets are hydro. So this acquisition will shift Brookfield Renewable Partners' asset base to 60% hydro and 40% wind and solar. With more wind and solar assets in the pipeline, that asset mix will likely be majority wind and solar in just a few years.
We don't know if being more focused on wind and solar assets will prove to be something investors value, but it could help.
The plan all along?
Brookfield Asset Management rescued TerraForm Power out of SunEdison's bankruptcy process, using Brookfield Renewable Partners as a financing tool. I'm speculating here, but I think the plan all along could have been to use the initial structure to eventually fold TerraForm Power into Brookfield Renewable Partners. It would keep the two from fighting over projects and capital from the parent and help move Brookfield Renewable's asset base to more wind and solar. This just completes the deal.
The market may not love Brookfield Renewable Partners' decision to buy TerraForm Power today, but I think it'll be a good move. It gives the company more scale and solidifies the focus on wind and solar business. Over the long term, that's where the industry's growth is.
