Power Generation company Atlantic Power (NYSE:AT) was already facing calls to sell itself from the Clinton Group when private equity firm Mangrove Partners announced an active stake earlier this month. Mangrove is pushing the company to commit to a large buyback program, and may also push for seats on the board, as well as a sale.
Its power business: Atlantic Power generated roughly 2,000 MW of power last year from power plants and wind farms throughout the U.S. and Canada. 53% of its production capability came from natural gas and 26% from wind, with biomass, coal, and hydro making up the rest.
Rising fuel input costs have hamstrung AT, as its operating cash flows have decreased from $167 million to $65 million between 2012 and 2014. This in turn led to a significant dividend cut in early 2013 that sent the stock spiraling down from around $15/share down to its current level between $3 and $4/share.
As part of an attempt to deleverage somewhat-AT has $1.4 billion in long-term debt vs. a market cap of $400 million-the company sold its portfolio of wind assets for $350 million in April. This means its portfolio is now heavily tilted towards natural gas.
The hedge fund pressure: AT conducted a strategic review last fall and the board decided that a sale was not in the best interest of the company. Shortly after the announcement, the Clinton Group, owning up around 2% o the company, penned a public letter to the board pushing for a sale.
Even though the Board denied receiving any offers above its market price, Clinton Group stated their belief that the company could complete a deal at above $4/share, which would be a roughly 25% premium to the current valuation. Clinton Group also expressed doubt that the company could be profitable as an independent entity:
"The "leaders" of this company cannot seem to understand that the concept of public independent, non-regulated power companies does not work. Time and time again, debt-laden companies that attempt to sell power on the wholesale market or to regulated utilities have imploded."
More recently, Tampa-based private equity firm Mangrove Partners announced an active stake with 7.5% ownership. Mangrove wants most of the proceeds from the sale of AT's wind projects to be returned to shareholders in the form of a $300 million special dividend. Mangrove has been discussing board representation, with the ultimate goal being to convince the company to either break up or sell itself.
Where we stand: Contrarian investors jumped aboard AT when it dropped from $15 to $5/share in 2013, only to watch the company continue to slide. With analysts projecting declining revenues and continued losses over the coming years, it's hard to see a great deal of upside for the stock going forward.
With a negative tangible book value and over $1.4 billion in long-term debt, the company is not exactly an enticing prospect for acquirers either. The Board's denial that it received any offers above the market price last fall stands in stark contrast to the optimism expressed by Mangrove Partners and Clinton Group.
Even if offers do materialize at the levels anticipated by these investors, the upside is not that high, only ~25%. Meanwhile, there's a big potential downside if cash flows continue to decline at the same level. Right now, AT looks like a high risk, low reward proposition for investors.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
