TransAlta chief executive officer Steve Snyder is about to show his poker-playing chops.
Mr. Snyder has $654-million on the table, as his company pushes a hostile takeover of Canadian Hydro Developers. The target company is insisting this just isn't enough chips to win the prize. Ever since TransAlta made its opening gambit, back in July, Canadian Hydro has pushed for a better offer, and sought a white knight.
Mr. Snyder hasn't blinked. TransAlta's original $4.55-a-share bid still stands, and it is set to expire tomorrow. However, the Street is convinced there's a far better bid coming: This stock has traded north of $5 ever since the takeover battle began.
No CEO wants to be seen as bidding against himself: Mr. Snyder is loath to improve his offer if it's possible that he can actually win Canadian Hydro with the original bid. Yet the market is clearly expecting more money to hit the table.
Here's one intriguing possibility: TransAlta does raise the stakes, but leaves investors disappointed. Analyst Rupert Merer at National Bank Financial weighed in this week with a report that said: "Though there are other proposals Canadian Hydro can chose from, none have surfaced. Despite this, we still suspect that TransAlta is most likely to increase its bid. This could happen before Oct. 2nd."
Now, here's where the poker game gets interesting for investors. Despite his view that a better bid is likely, Mr. Merer has a $5 target on Canadian Hydro, a price south of where the stock is trading.
In other words, the analyst thinks the market is overly optimistic on the chances of a big bump in TransAlta's bid, or a blockbuster offer from another suitor.
To buttress his view on Canadian Hydro's valuation, Mr. Merer looked at the price paid when a British company named International Power took over a private Canadian wind play called AIM PowerGen Corp.
AIM PowerGen operates 40 megawatts of wind farms in Ontario and is building projects that will supply another 40 megawatts. The takeover cost $189-million, and International Power will shoulder an additional $52-million in construction costs. So Mr. Merer's number-crunching shows this deal played out at 10 times AIM PowerGen's forecast EBITDA (earnings before interest, taxes, depreciation and amortization). At current prices, Canadian Hydro shares are also changing hands at 10 times their forecast EBITDA, according to National Bank Financial.
Down East deal maker
Kenneth Rowe is one of Atlantic Canada's smartest and toughest deal makers. This is no small distinction when the competition is named Irving and Sobey.
Mr. Rowe, chairman of privately held IMP Group, is now well and truly into a battle for control of publicly traded Vector Aerospace. This is the aircraft maintenance firm spun out of CHC Helicopter years ago, so Vector has its roots in one of Atlantic Canada's other dynastic business clans, the Dobbin family. There is plenty of history here.
For years, Mr. Rowe has been increasing his stake and influence at Vector - he is on the board, and IMP Group holds 37.3 per cent of the equity.
Earlier this week, IMP Group attempted to move to a control position without paying a premium price. The company offered to buy up to six million Vector shares at $6.52 each, which would give IMP Group a 53-per-cent stake.
Not so fast, said Vector.
A newly struck special committee of Vector directors advised shareholders that the IMP Group offer is not the "best interest" of the company. That dry corporate-speak came as Vector launched a bought deal, and effectively accused Mr. Rowe of acting against its best interest.
Vector has moved to raise money - and effectively dilute IMP Group - with a $45-million bought deal pitched at $6.35 a share. TD Securities and Dundee Securities are leading the transaction. Vector needs the cash to pay down debt. But again, to use dry corporate-speak, it is unusual for a potential takeover target to sell equity.
In a press release that came with the equity offering, Vector said: "On September 25, 2009, one business day prior to IMP Group's press release [announcing the offer for six million Vector shares], Messrs. Rowe and [IMP Group president and Vector director Stephen] Plummer received notice of a Vector board meeting at which a proposed equity offering was to be considered. IMP Group then issued its press release noting for the first time that its proposed offer is conditional upon 'no unnecessary or extraordinary actions dilutive to Vector's shareholders.' "
The next move in this corporate dust up should come from IMP Group - the company is likely to fire up a response to the Vector financing.
See Andrew Willis's Streetwise Blog at ReportonBusiness.com
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