Possible backdoor into BEP/BEPC

TransAlta Corp. (TAC in U.S., TA in Canada) is a Canadian power producer. Three years ago, Brookfield Renewable Partners (BEP) made a strategic investment of $750M to help finance the coal-to-gas transition of its legacy power plants. It also has a substantial and growing renewables portfolio, based in Alberta hydropower.


TAC’s market value seems relatively uncorrelated to better-known power companies, many of which are at or near 52-week highs. Although TAC trades in a fairly narrow range, it is nearer its 52-week low than high. It recently fell back below $10 U.S. for the first time since last summer.

Brookfield is TAC’s second-largest shareholder (behind Royal Bank of Canada) with a 13% stake, about four points higher than necessary to fulfill the terms of its investment agreement. BEP also holds $750M of exchangeable securities, which represent close to another 20% of TAC’s market cap. BEP could finance a buyout with shares trading at much higher multiples than TAC’s.

At the end of Q1, 2021 (before the annual meeting), Brookfield was holding 13.1% of TA common shares vs. a 9% commitment. It can be explained by either investment merits or acquisition intentions or some combination of both.


TAC owns slightly more than 80% of TransAlta Renewables, a yieldco with a larger market cap than its majority owner. As renewables become the main focus of the parent, the prospect of folding the yieldco into the parent has been a subject of speculation. When it was raised on the last earnings call, TAC’s CEO said only that it is committed to the current structure at present.

TransAlta is an unglamorous stock still related to coal. Before the capital injection from Brookfield, it did not have sufficient liquidity to meet its debt maturity and convert coal assets to gas. RNW [the Canadian ticker for the yieldco] growth has been slow and the management seems to have made its share of mistakes. For these reasons, the existing undervaluation is not particularly surprising. But the market has already smelled an opportunity - TA has more than doubled since the Brookfield transaction on Mar 25, 2019.

That was written in December, with the price slightly over $10 U.S. By this author’s calculations, TAC trades at about three-quarters of its SOTP valuation.

Almost without exceptions, purchasing common shares at the open market is an acquisition attempt that may or may not materialize later. Those who are familiar with Brookfield operations may immediately recall successful TerraForm Power (TERP) or Inter Pipeline (OTCPK:IPPLF) acquisitions. I doubt that BEP’s ambitions are limited to acquiring of minority (49% is the limit!) of Alberta Hydro as Brookfield is always interested in the eventual controlling position to have access to cash flows. The option to convert the Exchangeable Securities into the equity of Alberta Hydro seems like a put in case something goes wrong.

As is typical with Brookfield, there’s a lot of complexity here. TAC was in a precarious financial position prior to the BEP investment, which helps to explain the favorable terms. There is no guarantee that Brookfield will seek to buy out TAC, but TAC is now on a sound financial footing and appears to be an undervalued energy investment in its own right.

Just an idea. Do your own due diligence, of course.