Pattern Energy Group Inc.'s board of directors reiterated its support for a buyout by the Canada Pension Plan Investment Board after Water Island Capital LLC called on fellow Pattern Energy shareholders to reject an acquisition that Water Island Capital said undervalues the renewable energy company.
The November 2019 proposal from the Canada Pension Plan Investment Board calls for privatizing Pattern Energy through an all-cash transaction valued at about $2.63 billion. Pattern Energy stockholders would receive $26.75 per share, a premium of nearly 15% to the company's closing stock price before news reports in August 2019 indicated it was considering takeover offers.
Water Island Capital said in an open letter dated Feb. 18 that the offer is "inadequate" in light of surging investor interest in environmental, social and governance issues that is driving a "seismic shift in the valuation of renewable energy companies" since the deal was announced.
"Pattern Energy's shareholders are being asked to approve a transaction ... that originally offered at best a negligible premium, and now a significant discount, to Pattern Energy's standalone fair value," Water Island Capital, which owns about 4% of Pattern Energy's outstanding shares, said in the open letter.
Pattern Energy, whose shares were trading at $27.89 at 11:08 a.m. ET on Feb. 19, is part of a basket of renewable energy stocks tracked by S&P Global Market Intelligence that outperformed the S&P 500 by 20 percentage points in 2019. Those renewable energy companies have consistently outperformed stocks in the S&P Oil & Gas Exploration and Production Index.
In a Feb. 19 statement, Pattern Energy said its board believes that the offer from the Canada Pension Plan Investment Board, which manages money for the Canada Pension Plan, would provide shareholders with "significant, immediate and certain value."
"Assertions on Pattern Energy's potential standalone price absent the CPP Investments transaction are speculative and down-play a number of key factors," including monetizing an affiliated project developer and avoiding the need to raise public equity to fund future growth.
"In light of historic volatility in the sector, a short-term spike in prices should not be viewed as a reliable basis for predicting long-term value," Pattern Energy said.
Roger Foltynowicz, a portfolio manager at Water Island Capital, said in an interview that Pattern Energy would not discuss the fund manager's concerns before Water Island issued the open letter.
"In their minds, they're trying to keep it under the radar because they're getting a good deal," Foltynowicz said of Pattern Energy executives, noting that CEO Michael Garland would continue leading the company if the deal is completed.
A spokesperson for Pattern Energy did not immediately respond to a request for comment.
Pattern Energy shareholders are scheduled to vote on the proposal from the Canada Pension Plan Investment Board at a special meeting March 10.