WIND – take over arbitrage opportunity – low risk 20% upside

This is now a completely screaming buy IMHO.
I have bought a large portfolio weight at 50p – 20% of portfolio value. Posting quickly as these opportunities tend not to be around long…

WIND – are also known as Renewable Energy Generation.
The management – who know the company have offered 60p – or £61m for the assets but not the company itself…. The NAV of the company – ex intangibles – ex capitalized development is about £57m. The work in progress is on the books for £19m. If you believe that – £76m, instant 30% upside for management. I bought it today at 50p per share.

I used to analyse utilities in the city days so am more comfortable than usual with this type of business…

Usual way to assess value of the wind assets is £/MW installed. This is obviously rough as somewhere windy would be worth more, not windy much less… They sold St. Breock and Ramsey II (18MW) for £13.8m – giving £760k per MW. Goonhilly (12MW) was sold for £25m, Denzek Downs sold for £1.4m /MW. They have 34.7 MW onshore wind (Dec 2014). They operate but dont own more I suggest a a value of £1m-£2m / MW – giving a valuation of £34-68m. I will say £50m.

They have a pipeline – of 53MW wind with a high probability of completion – less 18Mw sold under the old tariff regime so lets say these are £500k / MW – £17.5m.

Wind has a pipeline of assets going through planning. Hard to value but in the 2014 presentation the cost of putting 124Mw in planning is £14m.
I will stick my finger in the air and say this is worth £5m.

They have 18MW Bio Oil plant. This is similar to but more valuable than diesel generation. This is harder to value. 1MW of diesel generation costs about £100k in a container from China. But it then needs to be installed / run and bio is much more valuable than regular diesel. In the books for £4.7m – as I dont have insight I will go with this. Cost was £6.3m – so likely worth more. I will say £5m.

Asset management is also listed as an area of expertise. I believe they have 56MW under management. Valued at £1m a MW gives £50m. I would say a valuation of 1%-2% of AUM so 500k-£1m. Fees tend to be higher for non traditional assets so I will go to £1m for this.

Total for this is
Installed Wind – £50m
Pipeline in progress £17.5m
Less likely Pipeline £5m
Bio oil plant £5m

In addition from the June 2015 Interim,
Tax asset £2.3m
Cash £13.7
Receivables £4.3
Assets for Sale £11.6

Less
Liabilities – £35m

Giving approximate value of £74.4m – very close to the NAV including work in progress – or giving management an upside of 25%. Due to their obviously close relationship with Blackrock I expect it is low risk for them and they expect to sell the existing assets.

Ownership is very much large institutions. I suspect they may want more money than is being offered here and this is the main risk for the deal falling through… Looking at the downside the pre-offer price was 38p – so if we go back to that I loose 12p, if I am right I gain 10p but the probability is overwhelmingly in my favour, this makes it a trade with a high positive expectancy.

Next question which should be asked is do management have the money to invest ? The board says they are “highly credible”, I can’t imagine they would be able to keep their posts if their bid fell through – far too many potential conflicts of interest…

Management can probably justly afford this – CEO has worked for them since founding in 2005. He has been paid £1.7m after tax since 08. He was in the city before that. Googling indicates he is a Tory voter, so likely has a few quid – probably a couple of million of his own He owns £150k worth of shares a pitifully small amount. CFO paid approximately £1.1m post tax since 08.

I recon at a punt £10m of equity between them – they can get £34m out of the company due to what is cash or about to be sold – inc Denzel downs. The actual cost – or what they need to borrow at the 60m they have offered is only £20m. A lot of money but given the assets it secures … OK I am assuming with this that they havent invested much in capex this year – which may not be correct.

An RNS on 19th Feb 2015 stated they held £22m cash with £5.9 recievable.

Other way to look at this is what is likely free cashflow. In year to 2014 REG had EBITDA ex development from wind of 3.4m – given minimal capex on existing sites this can easily service the debt needed to buy the company. OK there are losses from biopower and central costs – I would assume lots of these are growth / site development related.

Well worth a decent investment – low risk but good chance of a healthy profit…

6 thoughts on “WIND – take over arbitrage opportunity – low risk 20% upside”

  1. Any idea why they don’t just bid for the company outright rather than the underlying assets?

    How do you think the 60p would be returned to shareholders. Could be tax implications if its done as a special dividend?

    1. Hi Bill, Thanks for the comment…

      Buying assets also avoids need to get shareholders to sell to them. You can only squeeze out on AIM with 90% of shareholders and delist with a certain percentage (I think 75%).

      I suspect the sale of assets will be after a simple shareholder vote… Much easier to do and avoids the hassle of dealing with minority shareholders, also maximises management’s upside…

      It also buypasses city takeover code…

      Cynic in me suspects they are buying assets rather than company to shed hidden liabilities – ie someone paid a bung to a councillor at sometime to get planning permission. Shedding company avoids this risk.

      I dont have any evidence for WIND doing this whatsoever. There is lots of evidence out there for planners having taken bribes in the past….

      Return unlikely to be a special dividend – more likely a return of capital / compulsory redemption at 60p as its better for tax purposes – taxed at CGT rates (if not in ISA and you have already used your £11k limit)

  2. In the RNS it says “does not commence an offer period under The City Code on Takeovers and Mergers”.

    Maybe they don’t want to bid for the company outright because they have already done something or need to do something that would not comply with the “Code”. There is a lot of stuff in the “Code”. Could be an offer for the assets is just to avoid the “Code”.

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