Analysts said they expect TransAlta, one of Canada's largest electricity producers, will have to boost its $4.55-a-share offer after Canadian Hydro rebuffed TransAlta's earlier, seven-month courtship aimed at securing a friendly deal.
Faced with burdensome climate change regulations, the company doesn't expect to build any new coal plants once it completes its Keephills 3 plant, scheduled to open in 2011.
TransAlta chief executive officer Steve Snyder said the industry has to find commercially viable means to significantly reduce greenhouse gas emissions for new coal- and natural-gas-fired plants.
“Thermal energy, and coal in particular, are going to have to develop cost-competitive technologies to fundamentally reduce their carbon footprint in order to be a viable part of the electricity mix,” Mr. Snyder said in a telephone interview.
“Do I think it is going to happen? Yes. Do I think it is going to happen in the next 10 years? No. But it will happen.”
In the meantime, power producers like TransAlta will have to turn to renewable sources – including wind, hydro and biomass – to meet electricity demand that is expected to grow again once the recession ends.
TransAlta now relies on renewables for 15 per cent of its power output. That share would climb to 22 per cent with the acquisition of Canadian Hydro Developers.
TransAlta would also reduce its emissions of greenhouse gas on a per-megawatt basis. It could use new projects planned by Canadian Hydro – as well as those TransAlta is currently developing – to offset emissions from its coal- and natural-gas-fired plants in order to meet federal climate change regulations that are expected to be announced later this year. However, until the federal government unveils its regulatory framework for the power sector, the value of the credits generated by renewable power sources remains uncertain.
Mr. Snyder began courting Canadian Hydro in December, but received no indication that the company would entertain a takeover offer.
John Keating, who founded Canadian Hydro with his brother Ross in 1989, recently retired as CEO, and some analysts believe TransAlta waited for the transition before making the hostile bid directly to shareholders.
Canadian Hydro's board, which includes the founders, was meeting to discuss the bid, but did not issue any response prior to deadline. Under a shareholders' rights plan adopted by Canadian Hydro, TransAlta would have to win the support of two-thirds of equity holders in order to succeed.
TransAlta argues that the smaller independent faces a tough future given the depressed market for electricity in Canada, and the difficulties in credit markets. The cash offer of $4.55 a share represents a 25-per-cent premium over the July 17 closing price. Including the assumption of Canadian Hydro's debt, the deal would be worth $1.5-billion.
Investors clearly expect TransAlta to sweeten its bid, as Canadian Hydro jumped $1.25 – or 34 per cent – to $4.90 on the Toronto Stock Exchange July 20.
TransAlta's offer provides a decent valuation of Canadian Hydro's assets compared with some recent deals in the power sector, but could be enriched, said analyst Ben Isaacson of Scotia Capital Inc.
Mr. Isaacson said Canadian Hydro has been able to secure financing for its projects in the past and, with credit markets easing, will be able do so again. “I don't think the offer price is fairly valuing Canadian Hydro's potential value to TransAlta, and I think there is quite a bit more upside to go,” Mr. Isaacson said.
Mr. Snyder said the market typically overinflates share prices in companies that are targets of acquisition, and insisted he is prepared to walk away before exceeding TransAlta's expected rate of return on the investment.
“This offer provides Canadian Hydro Developers shareholders with significant, immediate and certain value for the company's existing assets, as well as its future growth potential,” he said in a morning conference call.
“For TransAlta, this transaction accelerates our current strategy and extends our leadership position to become the largest publicly traded provider of renewable energy in Canada,” he said.
Canadian Hydro operates 694 megawatts of wind, hydro and biomass facilities in Alberta, Ontario, Quebec and British Columbia, including the recently commissioned Wolfe Island wind farm near Kingston. It also has 252 megawatts in advanced stage of development elsewhere in Canada.
TransAlta, which operates in Canada, the United States and Australia, has been expanding its own renewable portfolio in recently years, primarily through wind projects in southern Alberta.