TransAlta’s takeover looks like it’s a no go

Calgary, Alberta-based Canadian Hydro Developers (TYSX:KHD) said its board of directors unanimously recommended its shareholders reject Calgary-based TransAlta’s (NYSE:TAC) unsolicited hostile takeover bid.

TransAlta proposed an all-cash offer to acquire all the outstanding shares of Canadian Hydro on Monday. The proposed transaction had an enterprise value of about C$1.5 billion ($1.36 billion). The offer had an implied deal value of about C$654 million ($589 million) based on 143.7 million shares outstanding as of May 13, 2009 (see TransAlta makes hostile $589M takeover bid for Canadian Hydro Developers).

TransAlta intended to use the purchase, being made through an acquisition entity at C$4.55 ($4.11) per share, to accelerate and expand its renewable energy portfolio, according to TransAlta’s CEO Steve Snyder.

But Canadian Hydro’s CEO Kent Brown told the Cleantech Group today that his company's board of directors is suggesting shareholders reject the takeover offer, calling it “inadequate” and the timing being “purely opportunistic." The company plans to pursue alternative strategies, including entertaining other bids.

Brown said the offer fails for a number of reasons, including TransAlta not taking into account of the value of its more than 150-employee team, which he said makes them the largest, most successful renewable energy company in Canada. The fact that Canadian Hydro is a “pure-play renewable company is not being recognized,” as well as the company’s robust pipeline of projects and its tax pool abilities to shelter income into the future, he said.

“That’s a huge value to TransAlta and others,” said Brown, referring to the tax pool. “The present and future value of our carbon credits also weren’t acknowledged. You put all these things together and it’s clear the offer is inadequate. The market thinks it’s inadequate as well.”

Canadian Hydro’s stock closed at C$5.10 today, higher than the offering price.

“We’re at a key inflection point in our 20-year history. We have doubled the size of our company in the last eight months—in the middle of a worldwide economic recession,” Brown said.

He said Canadian Hydro is “a financially strong company” and can weather the economic storm and come out of it extremely strong. He said its shareholders are just beginning to realize those benefits.

“I would have liked to see them acknowledge a higher stock price than what we’re seeing in the offer from them,” said Brown, declining to say how high.

On Monday, TransAlta's offer represented about a 30 percent premium to the volume weighted average price of Canadian Hydro’s common shares for the previous 10 trading days and a 25 percent premium to Canadian Hydro’s July 17 closing price. TransAlta spokesman Michael Lawrence did not return today's request for comment.

The combined companies would have a net generation capacity of 8,657 megawatts in operation. The renewables portfolio would include 1,900 MW in operation, or 22 percent of the combined portfolio. The two companies have 572 MW under construction and more than 600 MW in advanced-stage development, according to TransAlta.

Canadian Hydro is exploring a wide range of strategic options, including the sale of the company, Brown said. Canadian Hydro could also remain “a stand-alone company” if that’s what’s in the best interests of the shareholders, he said.

Brown also said that contrary to rumors TransAlta has only made one other offer on his company that took place on July 7, and the offer was the same as the current offer.

TransAlta said it first approached Canadian Hydro in late 2008 regarding the takeover, and has proactively been in conversations since then. But over the following seven months, a negotiated “friendly” deal couldn’t be achieved, Snyder said.

In contrast, Brown said the only conversation that took place was over “a casual lunch” between Snyder, Canadian Hydro’s COO Keith O'Regan and its founder John Keating, which wasn’t considered a negotiation, Brown said.

“A lunch is certainly not an offer,” Brown said.

Brown said more details are expected to come out in the next 15 days after Canadian Hydro has a directors’ circular. TransAlta said in a statement that it plans to review the directors' circular once it is filed and may provide additional comment at that time. The current offer remains open until Aug. 27, unless it with withdrawn or extended.

Brown said Canadian Hydro has 700 MW of installed capacity in wind, hydro and biomass facilities across four Canadian provinces. The company has more than 15 analysts covering its stock (see IPO drought? Cleantech companies flood Canadian markets).

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