Trustpower split frees new entity to chase wind power, independent adviser says

Thursday 18th August 2016

Trustpower's plans to carve out its windfarms and renewable development pipeline into Tilt Renewables will give the new entity freedom to chase opportunities and should outweigh the cost of the transaction, according to an independent adviser's report on the deal.

The Tauranga-based electricity generator and retailer released its scheme booklet on the transaction today, with directors unanimously backing a plan to create two separately listed companies. Trustpower would keep the trans-Tasman generation assets, while Tilt will get the wind projects that are either in development or planning stages and are situated mainly in Australia.

Shareholders will vote on the proposal on Sept. 9 in Tauranga, and if the resolutions are passed, will receive one share in each of the companies for every existing share they own in a court-approved scheme of arrangement. The companies would then start trading on the ASX and NZX in October.

Independent adviser Northington Partners says the two businesses are quite distinct with different growth and risk profiles, and that splitting them up would let different boards and management teams "refine strategies, objectives, and business processes to best suit the current circumstances and future opportunities facing each business", enhance their ability to raise new capital, and give shareholders clearer investment choices.

The adviser's report also anticipates the split would mean Trustpower's two biggest shareholders - Infratil with 51 percent and Tauranga Energy Consumer Trust with 27 percent - may be more open to reducing their stakes in the demerged entities as opposed to a sale of their Trustpower shares.

"Based on the nature of the two shareholders and their various public disclosures, we would expect that TECT is likely to have a higher level of long-term interest in New Trustpower, while Infratil may be more focused on the growth opportunities offered by Tilt Renewables," the report said.

Northington Partners says the split "definitely provides a better platform for pursuing the wind development opportunities" given TECT is "unlikely to be in a position to contribute the level of equity required to maintain its current shareholding position" if a significant amount of capital is needed.

"We suggest that a useful way to characterise the proposed demerger is that it puts Trustpower in a much better position to exercise the potentially valuable growth options it currently holds in wind generation developments, particularly in Australia," the report said. "While there remains considerable uncertainty over the number and scale of the projects that will be developed, we believe that the potential value creation from exercising these development options is significant and outweighs the costs of the proposed demerger."

Since the plan was first touted in December, Trustpower has confirmed development approval for the Palmer wind farm in South Australia, subject to the appeals process, and received sign-off to expand generation at the Salt Creek wind farm in Victoria. Majority shareholder Infratil has already given its blessing to the split, and its manager, HRL Morrison & Co, would have representation on the boards of both companies.

Northington Partners said Trustpower's board decided against selling Tilt Renewables because it was unlikely to attract a price capturing the full value of the development pipeline and chose not to sell the windfarm developments piecemeal as it would "create high transaction uncertainty and considerable periodic management distraction and would also involve significant transaction costs".

The adviser's report estimates transaction and other one-off costs from demerger transaction to be between $75 million and $90 million, an immaterial amount if the split benefits are achieved but representing a loss in shareholder value if they aren't.

Trustpower shares slipped 0.9 percent to $8.07, having gained 4.4 percent so far this year.

BusinessDesk.co.nz

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