Brookfield Renewable Partners (BEP -1.07%) has done an amazing job creating value for investors over its 20-year history. It has routinely generated market-beating total returns, powered by its dual focus of growing its cash flow and its dividend.
One of the keys to its success has been acquiring cash-flowing renewable energy assets to expand its portfolio and grow its cash flow. It recently sealed its latest such transaction by agreeing to buy the rest of TerraForm Power (TERP) that it didn't already own. That deal will enhance its scale, positioning it for continued growth in the coming years.
Sealing a deal
Brookfield Renewable initially offered to acquire the rest of the shares in TerraForm that it didn't already control in mid-January. At the time, it offered an all-stock deal that would exchange 0.36 shares of a new corporation Brookfield intends on forming for each remaining share of TerraForm. That ratio implied an 11% premium to TerraForm's trading price at the time.
However, after some negotiation, the two companies settled on a new exchange ratio of 0.381 of Brookfield's units for each share of TerraForm. That increase implies a 17% premium to TerraForm's closing price before the initial offer. Shareholders in TerraForm can also choose to either receive shares in the new Brookfield Renewable Corporation (and continue getting a 1099-Div tax form) or units of Brookfield Renewable Partners (and start receiving a schedule K-1 form).
Combining to create a renewable energy juggernaut
Brookfield Renewable Partners is already one of the largest publicly traded renewable energy companies. It operates more than 5,000 facilities across North and South America, Europe, and Asia. By acquiring the rest of TerraForm -- it already controlled a 62% stake in the company -- Brookfield will own a larger share of the assets it operates.
TerraForm currently owns wind farms and solar energy generating facilities in the U.S., Canada, Chile, Uruguay, the UK, Spain, and Portugal. The company has been adding to that portfolio, including recently buying solar energy facilities in the U.S. and Spain. It's also working on projects to repower two of its wind farms in New York State, which will boost its earnings when those projects come online in the future.
Aside from owning a larger stake in a growing portfolio, the transaction will further enhance Brookfield's scale. It will control roughly $50 billion of renewable energy assets that will generate about $1 billion of annual funds from operations (FFO) for the company.
The combined company also boasts one of the strongest balance sheets in the sector, which includes an investment-grade credit rating, no material debt maturities in the near-term, and about $3.1 billion of liquidity. That gives it the financial flexibility to continue investing in expanding its portfolio via both acquisitions and organic growth projects. These investments drive Brookfield's view that it can grow its FFO per unit by 9% to 16% per year through 2024 while also increasing its distribution at a 5% to 9% annual pace.
A bright future when business gets back to normal
Brookfield Renewable and TerraForm Power are joining forces during a challenging time for the world. They're making this move because they know that the current economic crisis due to the COVID-19 outbreak -- like those that came before us -- will eventually pass, and life will go back to a new sense of normal. When that happens, the economy will need the power to operate, which will increasingly come from renewable energy. That's why Brookfield has such a bright future even during these seemingly dark times.