TransAlta offers $654 million in cash to acquire Canadian Hydro Developers

COMMENT: Renewable energy is good business, especially when utility buyers like BC Hydro and Hydro Quebec guarantee a long-term, risk-free revenue stream to the development companies. In its portfolio of about 700 MW of generation projects, Canadian Hydro Developers has about 100 MW in BC, and other streams lined up.

This is another example of the big capital that is chasing power generation opportunities in BC. Canadian Hydro's stock shot from $1.19 a share to $4.84 with this takeover bid by TransAlta.

Canadian Press
Oilweek
July 20, 2009

CALGARY - After a failed attempt at a friendly deal with renewable power producer Canadian Hydro Developers (TSX:KHD), TransAlta Corp. (TSX:TA) says it is taking its $654 million all-cash hostile takeover offer directly to the target company´s shareholders.

With 143.7 million shares outstanding, the $4.55 per share bid, announced Monday, values Canadian Hydro at $654 million. However, TransAlta said including debt and other financial measures, the enterprise value of the bid is $1.5 billion.

TransAlta, a Calgary-based utility, said it approached Canadian Hydro´s board in December with a written offer, but was told the hydro, wind and biomass company preferred to remain independent.

"They made no reference to price. We made a full offer to their board and received back a note saying they do not want to pursue it. It´s simple as that," TransAlta chief utive Steve Snyder on a conference call with analysts and investors.

On the call, Snyder said proposed transaction is in the best interest of Canadian Hydro shareholders.

"Absent this offer, we believe they face significant uncertainty in today´s environment," he said.

"Our industry is highly capital intensive and financing can be challenging as a small, standalone company."

TransAlta said the offer is a premium of about 30 per cent to the average trading price of Canadian Hydro Developers common shares on the Toronto Stock Exchange for the last 10 trading days.

A takeover circular will be made available to Canadian Hydro shareholders on Wednesday.

"We have great respect for the company and its employees, and believe our respective shareholders and other stakeholders would be very well-served by the combination of these two great Alberta-based businesses," said Snyder.

TransAlta, which mainly operates mainly coal- and natural gas-fired power plants, wants to expand into renewable energy sources as environmental regulations become more stringent.

"We believe the combination of Canadian Hydro Developers´ portfolio and our operational and development capabilities and strong balance sheet, s a company well-positioned to succeed in a world in which both capital and carbon are constrained," Snyder said.

Canadian Hydro Developers operates 694 megawatts of wind, hydro and biomass power plants in Alberta, Ontario, Quebec and British Columbia. It also has 252 megawatts of advanced development projects in western and eastern Canada.

Combined, TransAlta and Canadian Hydro Developers would have net generation capacity of 8,657 megawatts in operation. The renewables portfolio would include 1,900 megawatts, or 22 per cent of the combined portfolio.

Going into trading Monday, Canadian Hydro had a stock market value of about $524 million, compared with an enterprise value of $1.5 billion.

Enterprise value is a measure of a company´s value, often used as an alternative to traditional stock market capitalization. The measure is calculated as market cap plus debt, minority interest and preferred shares minus total cash and cash equivalents.

TransAlta said the transaction will be funded initially with new credit from the Royal Bank of Canada and later with issues of corporate debt and between $200 million and $300 million of new equity.

The power producer said its bid will not have an impact on the company´s current dividend policy.

TransAlta said the offer will expire Aug. 27 and is subject to an acceptance of two thirds of common shares tendered. It would also need approval from the federal Competition Bureau and from provincial power regulators.

In Monday trading on the Toronto Stock Exchange, TransAlta shares fell 13 cents to $20.88.

Meanwhile, Canadian Hydro stock jumped $1.19 to $4.84, a gain of 32.6 per cent in trading of 14.5 million shares.

The stock price jump above the TransAlta bid price suggests investors believe Canadian Hydro deserves a higher offer, either from TransAlta or from another bidder.

http://www.oilweek.com/news.asp?ID=23597

TransAlta signals green intentions with Canadian Hydro bid

$653-million offer would give the heavily coal-based company one of the largest wind and renewable portfolios in the country

TransAlta Corp. (TA-T21.070.271.30%) is sending a clear signal that it is counting on renewable power to fuel its growth for at least the next decade, unveiling a hostile offer for Canada's largest independent alternative energy producer.

TransAlta, whose traditional coal-fired power business faces years of government-imposed stagnation as a result of pending climate change regulations, Monday launched a $653-million bid for Canadian Hydro Developers Inc., (KHD-T5.000.102.04%) which has a stable of operating and planned wind, hydro and biomass projects.

Analysts said they expect TransAlta, one of Canada's largest electricity producers, will have to boost its $4.55-a-share offer after Canadian Hydro rebuffed TransAlta's earlier, seven-month courtship aimed at securing a friendly deal.

Faced with burdensome climate change regulations, the company doesn't expect to build any new coal plants once it completes its Keephills 3 plant, scheduled to open in 2011.

TransAlta chief executive officer Steve Snyder said the industry has to find commercially viable means to significantly reduce greenhouse gas emissions for new coal- and natural-gas-fired plants.

“Thermal energy, and coal in particular, are going to have to develop cost-competitive technologies to fundamentally reduce their carbon footprint in order to be a viable part of the electricity mix,” Mr. Snyder said in a telephone interview.

“Do I think it is going to happen? Yes. Do I think it is going to happen in the next 10 years? No. But it will happen.”

In the meantime, power producers like TransAlta will have to turn to renewable sources – including wind, hydro and biomass – to meet electricity demand that is expected to grow again once the recession ends.

TransAlta now relies on renewables for 15 per cent of its power output. That share would climb to 22 per cent with the acquisition of Canadian Hydro Developers.

TransAlta would also reduce its emissions of greenhouse gas on a per-megawatt basis. It could use new projects planned by Canadian Hydro – as well as those TransAlta is currently developing – to offset emissions from its coal- and natural-gas-fired plants in order to meet federal climate change regulations that are expected to be announced later this year. However, until the federal government unveils its regulatory framework for the power sector, the value of the credits generated by renewable power sources remains uncertain.

Mr. Snyder began courting Canadian Hydro in December, but received no indication that the company would entertain a takeover offer.

John Keating, who founded Canadian Hydro with his brother Ross in 1989, recently retired as CEO, and some analysts believe TransAlta waited for the transition before making the hostile bid directly to shareholders.

Canadian Hydro's board, which includes the founders, was meeting late yesterday to discuss the bid, but did not issue any response prior to deadline. Under a shareholders' rights plan adopted by Canadian Hydro, TransAlta would have to win the support of two-thirds of equity holders in order to succeed.

TransAlta argues that the smaller independent faces a tough future given the depressed market for electricity in Canada, and the difficulties in credit markets. The cash offer of $4.55 a share represents a 25-per-cent premium over Friday's closing price. Including the assumption of Canadian Hydro's debt, the deal would be worth $1.5-billion.

Investors clearly expect TransAlta to sweeten its bid, as Canadian Hydro jumped $1.25 – or 34 per cent – to $4.90 on the Toronto Stock Exchange Monday.

TransAlta's offer provides a decent valuation of Canadian Hydro's assets compared with some recent deals in the power sector, but could be enriched, said analyst Ben Isaacson of Scotia Capital Inc.

Mr. Isaacson said Canadian Hydro has been able to secure financing for its projects in the past and, with credit markets easing, will be able do so again. “I don't think the offer price is fairly valuing Canadian Hydro's potential value to TransAlta, and I think there is quite a bit more upside to go,” Mr. Isaacson said.

Mr. Snyder said the market typically overinflates share prices in companies that are targets of acquisition, and insisted he is prepared to walk away before exceeding TransAlta's expected rate of return on the investment.

“This offer provides Canadian Hydro Developers shareholders with significant, immediate and certain value for the company's existing assets, as well as its future growth potential,” he said in a morning conference call.

“For TransAlta, this transaction accelerates our current strategy and extends our leadership position to become the largest publicly traded provider of renewable energy in Canada,” he said.

Canadian Hydro operates 694 megawatts of wind, hydro and biomass facilities in Alberta, Ontario, Quebec and British Columbia, including the recently commissioned Wolfe Island wind farm near Kingston. It also has 252 megawatts in advanced stage of development elsewhere in Canada.

TransAlta, which operates in Canada, the United States and Australia, has been expanding its own renewable portfolio in recently years, primarily through wind projects in southern Alberta.