The company, also based in Calgary, urged its shareholders to reject TransAlta's offer of C$4.55 per share. With 143.7 million shares outstanding, the bid amounts to C$654 million in cash. It also assumes C$846 million in debt and other items, for a total enterprise value of C$1.5 billion.
The bid is inadequate, says Canadian Hydro CEO Kent Brown. "It doesn't reflect even the value of our current assets, let alone our growth prospects," he adds. Canadian Hydro, says Brown, is actively seeking a better offer and is using the normally confidential data to give prospective suitors information on the company and its operations. "It is not certain that any transaction will materialise, but we're very encouraged by the level of interest and the quality of the participants," Brown said during a conference call coinciding with the release of a circular outlining the Canadian Hydro board's assessment of the bid. He declined to provide more specifics.
The company, which is the largest wind power producer and the largest solely renewable energy developer in Canada, has 21 operating wind, run-of-river hydro and biomass facilities totalling 694 MW. The facilities are spread across four provinces, with 89% of their output covered under long-term power purchase agreements (PPAs) with an average life of 18 years. The bid, says Brown, is significantly below their replacement value. "These are simply crown jewels. These facilities warrant premium pricing - not the discount pricing that we see in this offer," he says.
The company has another 185 MW of projects with PPAs that still have to be constructed, and a further 1634 MW in its development pipeline.
Brown also said the offer was timed to take advantage of the hit Canadian Hydro shares took in the wake of the financial crisis. TransAlta also is looking to step in at a "key inflection point" in Canadian Hydro's 20 year history, says Brown.
"It takes many years for renewable energy companies to launch enough prospects and move projects far enough along the development path that they begin to generate significant free cash flow to finance future growth - at which time the growth curve can accelerate," he explains. Canadian Hydro is at that point, he adds. "We anticipate soon being able to fund the equity portion of one 100 MW project per year internally."
In launching its bid, TransAlta said Canadian Hydro would be better off as part of a larger, well-capitalised entity. "(Without) this offer, we believe they face significant uncertainty in today's environment," CEO Steve Snyder said. TransAlta said it was sticking with its bid despite the unanimous recommendation by Canadian Hydro's board of directors to reject it, saying it "represents a significant premium" on top of the value that the market had already assigned to Canadian Hydro. The offer was almost 30% more than Canadian Hydro's closing price on the Toronto Stock Exchange prior to the bid announcement, but in the weeks following, shares traded about 10% higher than TransAlta's tender.
Snyder said: "We recognise the quality of Canadian Hydro's assets, including its people, growth opportunities, and environmental attributes, and these were fully considered by us before our bid."
A number of analysts, however, say they expect TransAlta will need to improve its offer, particularly if other potential bidders enter the fray. In a number of research notes analysing the offer, Ben Isaacson of Scotia Capital sets a target price of C$5.50 a share.