Algonquin Power & Utilities Corp. has announced:
Algonquin Power & Utilities Corp. to Acquire The Empire District Electric Company in C$3.4 Billion (US$2.4 Billion) Transaction
Company Release – 02/09/2016 16:00
Acquisition is expected to be significantly accretive to EPS and FFOPS
Highlights:
- • Major regulated utility acquisition results in a pro-forma Algonquin Power & Utilities Corp. asset base of C$8.9 billion
- • Empire shareholders to receive US$34.00 per common share in cash, representing a 21% premium to the closing share price on February 8, 2016
- • Aggregate purchase price of C$3.4 billion (US$2.4 billion), including assumed debt, represents a 1.49×1 multiple of Empire’s projected rate base and a 9.2×2 multiple of Empire’s 2017 EBITDA
- • Expected to be immediately accretive to APUC’s earnings per share (EPS) and funds from operations per share (FFOPS), positioning APUC for further growth
- • Average annual accretion to EPS and FFOPS expected to be approximately 7% to 9% and 12% to 14%, respectively, for the three year period following closing
- • Acquisition is aligned with APUC’s financial objectives and provides continuing support to APUC’s 10% annual dividend growth rate target
- • APUC’s financing plan designed to maintain strong investment grade credit rating
- • Shifts APUC’s overall business mix towards regulated operations, with EBITDA from regulated operations increasing from 51% to 72%2
- • Empire has complementary operations in the States of Missouri and Arkansas, with regional headquarters located in Joplin, Missouri
- • Empire has an experienced management team committed to providing customers with safe, reliable, cost effective utility services
- • Empire will maintain its headquarters in Joplin after the acquisition
- • APUC expects to retain all existing Empire employees and the Empire management team will lead Liberty Utilities’ Central US Region
- • Empire’s customer rates unaffected by the acquisition
They later announced:
that APUC [Algonquin Power & Utilities Corp.] and its direct wholly-owned subsidiary, Liberty Utilities (Canada) Corp. (the “Selling Debentureholder”), have entered into an agreement with a syndicate of underwriters (the “Underwriters”) led by CIBC Capital Markets and Scotiabank, under which the Underwriters have agreed to buy, on a bought deal basis, C$1 billion aggregate principal amount of 5.00% convertible unsecured subordinated debentures (“Debentures”) of APUC (the “Offering”). In connection with the Offering, the underwriters have also been granted a 15% over-allotment option to purchase additional Debentures within 30 days from the date of the closing of the Offering solely to cover over-allotments, if any, and for market stabilization purposes.
All Debentures are being sold on an instalment basis at a price of C$1,000 per Debenture, of which C$333 is payable on the closing of the Offering (the “First Instalment”) and the remaining C$667 (the “Final Instalment”) is payable on a date (the “Final Instalment Date”) to be fixed by APUC following satisfaction of all conditions precedent to the closing of APUC’s acquisition of The Empire District Electric Company (NYSE:EDE) (“Empire”).
So S&P has slapped ‘Outlook-Negative’ on them:
- •On Feb. 9, Algonquin Power & Utilities Corp. announced the US$2.4 billion proposed acquisition of Empire District Electric Co., a Missouri-based utility.
- •The cash portion of the proposed acquisition is partly being financed with the issuance of convertible debentures, with this additional debt pushing Algonquin’s adjusted funds from operations-to-debt to below 14%.
- •We are revising our outlook on Algonquin and its subsidiaries Algonquin Power Co. and Liberty Utilities Co. to negative from stable to reflect the execution risk of the transaction and the potential for lower ratings stemming from the limited ability to absorb weaker financial performance.
- •We are also revising the industry risk score to low from intermediate to reflect the increase in Algonquin’s consolidated cash flow that comes from regulated utilities.
- •We are also affirming all ratings on the companies, including our ‘BBB’ long-term corporate credit rating on Algonquin.
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The debentures have features that encourage holders to convert, such as interest payments ceasing on closing of the acquisition. However, we treat the debentures as debt until they convert. As a result of this analytical treatment, we expect adjusted funds from operations (AFFO)-to-debt to decline to about 10.5% until the debentures are fully converted to equity, which is below our 14% downgrade threshold for the rating.
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The negative outlook reflects our expectation that APUC’s credit metrics will materially weaken in 2016 due to the issuance of convertible debentures to finance in part the cash purchase of Empire. Although we expect that the debentures will have a very high likelihood of conversion in 2017 when the transaction closes, in the meantime we expect that credit metrics will be weak for the rating, eliminating any financial cushion at the current rating level. The negative outlook also reflects the execution risk associated with the additional equity and debt necessary to support the transaction and to fund the company’s ongoing development plans.We could lower the ratings on APUC if the company is unable to execute its development projects and acquisitions with financing arrangements of debt and equity that lead to AFFO to total debt below 14% by 2017 once the convertible debentures have converted.
We could revise the outlook to stable if the proposed equity issuance occurs as contemplated and APUC achieves AFFO to debt of 14% on a consistent basis.
Affected issues are AQN.PR.A and AQN.PR.D. Both are tracked by HIMIPref™ but are relegated to the Scraps index on credit concerns.
Update, 2016-2-11: Review-Developing by DBRS:
DBRS Limited (DBRS) has today placed the BBB (low) Issuer Rating and Pfd-3 (low) Preferred Shares ratings of Algonquin Power & Utilities Corp. (APUC or the Company) Under Review with Developing Implications. This rating action follows the announcement that the Company has entered into an agreement and plan of merger pursuant to which Liberty Utilities Co. (LUC) will indirectly acquire The Empire District Electric Company (Empire) and its subsidiaries (the Transaction).
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The rating action reflects DBRS’s view that the Transaction will have a modestly positive impact on APUC’s business risk assessment (BRA). The impact on the financial risk assessment (FRA) is uncertain since the financing plan has not been finalized.
I am glad you posted that but I wish someone (not necessarily as your plate of things to do is already full) could have explained these debenture features I am not familiar with:
All Debentures are being sold on an instalment basis at a price of C$1,000 per Debenture, of which C$333 is payable on the closing of the Offering (the “First Instalment”) and the remaining C$667 (the “Final Instalment”) is payable on a date (the “Final Instalment Date”) to be fixed by APUC following satisfaction of all conditions precedent to the closing of APUC’s acquisition of The Empire District Electric Company (NYSE:EDE) (“Empire”)
And here is how it was “sold” to me:
QUOTE
Algonquin Power & Utilities Corp. (AQN)
Convertible bond by way of installment receipt
5.0% quarterly coupon due March 31, 2026. However term of approx 1 year to expected acquisition close date
$1.0 Billion + option
$1000 per deb – Client initial cost is 1/3rd – implied 15% annualized yield
($333 on issue settlement, 2/3 on acquisition close date)
$10.60 conversion price, 8.2% discount to last trade $11.55
Scotia CO-LEAD at 24%
March 1, 2016
UNQUOTE
Their “implied 15% annualized yield” made me salivate one second but I did take over on myself with the words of wisdom “I you don’t understand what it is about say “no thank you””.