Last Monday, Pattern Energy announced that it has signed a $6.1bn deal to sell out to the Canada Pension Plan Investment Board.
Under the terms of the transaction, which is due to close by the end of June 2020, CPPIB is set to acquire 100% of Pattern for $26.75 per share. This implies an enterprise value of $6.1bn including net debt.
At the same time, CPPIB has signed a deal with Riverstone Holdings to merge Pattern Energy with Pattern Energy Group Holdings 2 LP, also called Pattern Development. It is looking to bring the operating assets and development skills under one company.
Pattern Energy’s team, led by Mike Garland (pictured), is set to remain as head of the combined company, which is currently active in North America and Japan.
Garland said the deal would give certainty to Pattern’s shareholders, who will receive a 14.8% premium on the share price compared to where it was before buyout rumours started.
Why it matters
Pattern Energy is a well-known company and so a deal of this size will always attract interest. But this agreement is also symbolic because the decision to merge Pattern’s operational and development arms appears to ring the death knell for US yieldcos that burned so brightly in 2014 and 2015, before finally flopping from the middle of 2015.
For a while, US renewables yieldcos were attractive stock market vehicles.
They promised double-digit returns on assets that would typically deliver a steady 5%-6% return, with the idea that yieldco owners would use the funds raised to finance new developments. The problem is that the yieldco owners could only afford to pay these dividends if they kept buying new assets and raising fresh money on the stock market.
This was unsustainable. The fierce competition between yieldcos forced up prices for wind and solar assets, which affected returns – and, eventually, damaged investor confidence.
For a model reliant on retail investors, this was problematic as these investors tend to think more short-term than large institutions and so, when confidence started to fall, it plummeted. SunEdison was the biggest victim of this slump.
Since then, Pattern is by no means the only yieldco to be bought. Brookfield acquired the former SunEdison pair TerraForm Global and TerraForm Power, for example. But Pattern Energy is still one of the more recognisable names and so feels important.
And yet, despite the history of the US renewables yieldco model, we wouldn’t say it’s dead.
For one thing, there have been yieldcos that made it work. European-based yieldcos such as Greencoat UK Wind traditionally took a more conservative approach than their brasher US counterparts, and are still active in the market. Yieldcos can work but not when they are trying to claim that wind or solar farms are double-digit-return assets.
We can also see similar yieldco structures emerging.
In September, Goldman Sachs Renewable Power closed a $1.9bn funding round so that it could buy up solar projects and receive cashflows from the assets for decades. Goldman Sachs says it wants to give investors access to high-yield returns for investment-grade credit risks. Sounds awfully like a yieldco to us.
But Goldman Sachs has said that, because it isn’t developing, it also doesn’t need to raise large amounts of funding to support its development activities. Its entire model isn’t reliant on raising huge amounts of money via its yieldco in the same way as some of its predecessors’ were, and so it appears to be learning from what happened.
And what about Pattern? Well, it feels like a good chance to bring its operations back under one roof with financial support from the cash-rich CPPIB. As Bruce Hogg, head of power and renewables at CPPIB said: “[Pattern] aligns well with CPPIB’s renewable energy investment strategy and increasing global demand for low-carbon energy.”
The bottom line
Pattern has negotiated the ups and downs of the US yieldco market better than most of its counterparts, but we cannot ignore the symbolism of this deal. That said, yieldco structures can work and we welcome the recent conservatism in the sector.