Algonquin Power and Utilities Corp. AQN-T announced this week that it may hive off its renewable energy group through a sale or spinoff, leaving investors contemplating whether the recovering stock is about to get a whole lot better.
In its current formation, the company’s renewables group of wind, solar and hydroelectric generating facilities sits alongside a regulated services group, which is a diversified utility that provides electricity, natural gas and water in the United States and Canada.
For years, this combination worked well.
The utilities side of the business provided steady returns, while renewables gave investors access to the appealing growth of wind and solar power development as North America transitioned to cleaner sources of energy.
In Algonquin, investors had a green stock with a big dividend.
But Algonquin has delivered a volatile ride over the past six months as soaring borrowing costs and disappointing financial results weighed on the stock and threatened its balance sheet and its investment-grade credit rating.
The company cut its quarterly payout in January by 40 per cent. In April, it walked away from a deal to acquire Kentucky Power, removing some debt concerns but raising questions about where Algonquin was headed.
Now investors know – well, sort of.
Algonquin said on Thursday it has begun a strategic review of its renewable energy business and retained J.P. Morgan as its financial adviser. The results of the review, expected by the time the company reports its second-quarter earnings in August, could lead to a spin-out or sale.
Arun Banskota, Algonquin’s chief executive officer, believes both the utilities and renewables groups are attractive.
“Both are positioned to benefit from the energy transition, but we believe our assets are undervalued,” Mr. Banskota said during a call with analysts.
A sale or spinoff, the thinking goes, will create two distinct groups that will be more appealing to investors looking for exposure to one type of asset. These assets will be easier to compare with other “pure-play” utilities and renewable energy players.
Ancora Holdings Group, a U.S. activist investor that began accumulating Algonquin shares last year, has been pushing for an overhaul.
“I think at this point there will need to be a fresh set of eyes to evaluate the portfolio and prune things that don’t necessarily make sense right now,” Patrick Sweeney, a portfolio manager at Ancora, said in an interview in late April.
There are examples of companies carving themselves up and rewarding investors using a similar streamlining approach.
A recent case: General Electric Co., a struggling conglomerate that spun off its health division earlier this year and plans to separate its jet engine business from its energy unit in 2024.
So far, investors appear to like the more streamlined version. GE shares have risen 53 per cent in 2023 and GE HealthCare Technologies Inc. is up 28 per cent. Anyone who bought GE shares before the spinoff, or soon after, did very well.
The case for Algonquin rests on the idea that its assets are undervalued, and a reorganization will – as the saying goes – unlock shareholder value.
The utilities group is valued at less than 15 times analysts’ estimates for 2024 earnings, which is lower than the valuations of larger stand-alone Canadian utilities. The price-to-earnings ratio for Fortis Inc. is 19.4, according to Robert Hope, an analyst at Bank of Nova Scotia. For Hydro One, the P/E is 21.2.
David Quezeda, an analyst at Raymond James, estimates that the renewables assets are worth about US$3-billion, not including Algonquin’s stake in Atlantica Sustainable Infrastructure PLC. Money raised through a sale could be used for share buybacks and investments in the core utilities group.
The case for investing in Algonquin now is hardly clear, though.
Algonquin’s share price has already bounced from its recent lows, suggesting that investors may be anticipating some sort of attractive breakup already. The shares ended the week at $11.66 in Toronto, up more than 30 per cent since the end of December.
As well, there is no certainty about what the strategic review will do, if anything. Mr. Banskota merely reiterated that the company will keep an open mind, leaving analysts with little to chew on.
“Potential outcomes are wide ranging and it’s unclear how it will all play out,” Mark Jarvi, an analyst at CIBC World Markets, said in a note.
A safe approach is to simply wait. In the case of GE, the shares took off after investors knew exactly what the health care spinoff would look like. The rally continued months after the split was completed.
Algonquin may be about to unlock shareholder value, but investors haven’t even seen the keys.