Tom Konrad CFA
Western Wind and the Toronto Hedge Funds
Last October, Western Wind Energy (TSXV:WND, OTC:WNDEF) received an unsolicited takeover bid of $2.50 a share from Algonquin Power (TSX:AQN, OTC:AQUNF) to buy the company. Before the bid, the stock had been trading in the $1.20-$1.25 range, but President and CEO Jeff Ciachurski felt that it did not fully value the company’s projects and assets, including approximately $1 per share of US tax assets which the Canadian company Algonquin would not be able to use.
Large shareholders at the time were in favor of the sale, including at least one shareholder owning 18.6% of the stock who had entered into an agreement to support Algonquin’s bid. However, in the face of Western Wind’s vociferous opposition, Algonquin decided a hostile takeover was not in its interest, and withdrew the offer and terminated the lock-up agreement.
A group of shareholders, which management identifies as Toronto-based hedge funds, were unhappy to be unable to book a quick profit, and took steps to begin a proxy battle to take control of Western Wind’s board. The intent was to take control of the company’s board and put Western Wind up for sale.
Western Wind’s Kingman I Wind & Solar park. Photo courtesy of the company.
Proxy Battle Looms
That proxy battle would have taken place at Western Wind’s annual meeting, due this September.
In a conference call two weeks ago, Ciachurski said he had no plans to sell the company until 2013 at the earliest. Today, the company announced plans to sell the entire company and its assets as soon as possible. What changed?
Although I’m now entering the realm of pure speculation, it appears to me that management believes that the recent share price fall in the wake of a disappointing federal cash grant for the company’s Windstar project has allowed the hedge funds and their allies the opportunity to gain control of enough of Western Wind’s stock to win a proxy battle. With two weeks having passed since Western Wind CEO and President Jeff Ciachurski announced he would lead a delegation to Washington in the hopes of getting the full grant re-instated, Ciachurski likely now believes that additional grant money will not be forthcoming, and disappointed shareholders are more likely to vote against management in any proxy battle.
[UPDATE: A company spokesman contacted me to say that my speculation regarding the Windstar cash grant is incorrect, and that the delay is related to difficulty scheduling time with a judge.]
Since Ciachurski now seems to believe he would lose a proxy battle, and the new board would be likely to put the company up for sale anyway, he has decided to steal their thunder, and put the company up for sale himself. The press release mentioned that,
The CEO of Western Wind receives a bonus within his Compensation Agreement that pays out increased amounts of cash on obtaining the highest share price on the sale. Western Wind emphatically states that the CEO and Board are highly motivated to achieve the highest sales price, and are the only parties able to achieve the highest sale price possible.
In particular, this “increased amount” is $2 million which Ciachurski will receive if the sale price is $3 a share or more and an extra $1 million for each additional dollar above $3, according to Western Wind’s 2011 proxy statement.
Likely Sale Price and Timing
If Ciachurski believes that he has a better chance of eliciting an offer of $3 or more for Western Wind than would the new managers after a successful proxy fight, he has a strong incentive to conduct the sale himself. We know they would be satisfied to sell the company for $2.50 a share, so he justifiably worries that they might sell for less than $3, if only to expedite the sale.
With the company already up for sale, other shareholders are much less likely to vote for a slate of directors whose platform is to put the company up for sale. Further, with a sale already in progress, the Toronto funds will likely not go through the trouble and expense of staging a proxy battle, unless they believe that Ciachurski would cancel sale process after the annual meeting. But since such a cancellation would destroy any trust most shareholders have for Ciachurski, I would expect the sale to go through (although the search for a buyer could drag on if Ciachurski is unable to find a buyer willing to pay the magic $3 per share or more he will want to hold out for.
I expect Western Wind will sell for something more than $3 a share. This is easily possible, since the value of the company’s assets based on discounted cash flow is north of $5 a share, so a protracted sale process is far from inevitable. Even if Ciachurski wants to delay a sale, he will have limited flexibility to do so. This morning’s press release listed three milestones:
1. Financial completion and start of major construction on the 30-MW Yabucoa Project, Puerto Rico. This will add $160 million to Western Wind’s balance sheet to approximately $560 million at time of sale;
2. Negotiating the balance of the cash grant proceeds from treasury;
3. Completion of the mezzanine loan facility from our senior lender in the amount of $25 million, which can repay the high cost corporate notes;
Negotiations with the treasury are unlikely to drag on for months: The original grant process is supposed to take only 60 days, so it seems unlikely that Western Wind’s appeal will task that long. The completion of the mezzanine loan facility is also unlikely to drag out for more than a month or two. That leaves the start of construction of the Yabucoa Project, which the company expects to begin by October, and almost certainly to begin by December.
Champlin / GEI Acquisition
The all-share deal to acquire a 4 GW development pipeline from Champlin / GEI Wind Holdings is almost certainly off. In a conference call exactly two weeks ago, Ciachurski said that this deal would be finalized “in the next two weeks.” If it were going to be finalized at all, there would have been a mention in today’s news release.
The stated motivation for the Champlin/GEI deal was
to provide a long term development pipeline for Western Wind, and that pipeline is unlikely to be useful in the case of a quick sale, while the 8 million shares of stock which were to be issued in exchange for the pipeline would lower the expected sale price. Further, the unstated motivation for the deal was likely that Ciachurski wanted those 8 million shares in friendly hands, supporting him in any proxy battle. Since a proxy battle is now unlikely, this motivation no longer applies.
A sale agreement will almost certainly be finalized sometime this year, even in the event Ciachurski cannot get his $3 price. But we will not have to wait months in order to get a lot more information about the process, and even see some bids. In order to avoid a proxy battle at the annual meeting, the company will need to provide enough information to shareholders to make it clear that a sale is virtually certain. That means that before the late August record date for the annual meeting, Western Wind will likely have selected two M&A advisory firms to advise on the sale. I think it’s also likely that we will see one or more initial bids or expressions of interest before the end of August.
A sale may not be finalized until towards the end of the year, but expect Western Wind shares to continue rising rapidly, as more details of the expected sale emerge over the next few weeks.
Disclosure: Long WNDEF.
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