Trustpower shareholders have approved the demerger of Trustpower (TPW) into Tilt Renewables which will emerge as a separately listed company on October 13.
Forsyth Barr broker Suzanne Kinnaird said TPW would retain all its hydro assets and its retail business after the demerger.
Following the split, most of Tilt’s assets would be in Australia and TPW’s assets would be predominantly in New Zealand.
The main reason for the demerger was it enabled the development of Tilt’s significant Australian generation prospects, she said.
A significant barrier to developing the projects had been TPW’s corporate structure.
High debt levels and the Tauranga Energy Consumer Trust’s 26% holding in TPW meant raising equity had been problematic.
Given the trust had supported the demerger, it was reasonable to assume it was willing to be diluted should Tilt raise equity to fund new developments. It also fitted Infratil’s narrative of wanting to invest in Australian renewable generation, Ms Kinnaird said.
Infratil held 50.5% of TPW.
Before the demerger scheme book was released, Forsyth Barr saw a value upside from the demerger.
However, high transaction costs and a slump in Infigen’s share price (Tilt’s main comparable company) meant the near-term upside dissipated.
The demerger transaction costs were material and were expected to be between $68millon and $82million.
Between $43million and $50million of those costs were related to refinancing the debt of TPW and Tilt, she said.
While all of those costs were incurred upfront, there were offsetting benefits reducing the negative impact.
Many of the offsetting benefits, such as the bank establishment fees and Mahinerangi depreciation, still resulted in a loss.
Forsyth Barr estimated the after-tax cost of the demerger was between $15million and $20million.
"A key implication of the high transaction costs is that both TPW and Tilt will start with higher levels of debt than otherwise anticipated."
Tilt’s greatest potential lay in its development options. It had about 1700MW of Australian development options, 455MW of which were consented.
The outlook for wind development was mixed, with significant uncertainty overhanging the sector, Ms Kinnaird said.
The uncertainty had meant few projects were starting, although there were some signs of movement.
The deadline to start producing renewable energy certificate prices was getting closer.
"Overall, we believe deals will be done, albeit the timing is unclear."
The post-merger share trading range was expected to be similar to the current share price.
The estimated trading range for Tilt was between $2.15 and $2.55 a share and $5.45 to $5.70 a share for TPW, ex-Tilt.
Issues which could affect Tilt’s share price in the near-term were the potential for the Tauranga trust to sell its 26% share and its main competitor trading on multiple ratios lower than TPW.
If Tilt traded below Forsyth Barr’s estimated range, it should be viewed as a buying opportunity, she said.
Tilt’s dividend payout ratio would be between 25% and 50% of free cash flows after deducting required debt repayments.
The debt repayments would limit the dividend Tilt was able to pay.
TPW’s free cash flow payout ration was similar to its generator-retailer peers at 70% to 90%.
"Our rating is neutral. While the demerger of TPW makes strategic sense, as it provides investors with choice and will make funding new wind farms easier, we believe TPW is fairly priced. Also, TPW’s retail strategy is showing signs of slowing earlier than anticipated."
