One of the two major shareholders seeking a full takeover of Tilt Renewables Ltd (NZX & ASX: TLT), Wellington-based investor Infratil Ltd (NZX :IFT) sees some kinks in Tilt’s independent adviser report as part of its defence.
Infratil said the Northington Partners document for Tilt which included a valuation range for Tilt Renewables shares of between $NZ2.56 and $NZ3.01 per share.
Infratil said there are a number of areas where the independent adviser's assumptions are significantly more favourable than market comparatives.
So it has commissioned an independent report from Grant Thornton Corporate Finance Pty Ltd to review the assumptions underlying Northington Partners valuation.
Infratil said Grant Thornton has extensive experience in preparing independent expert reports with strong credentials in valuing renewable energy businesses and it has concluded that a number of assumptions adopted by Northington are “overly optimistic and do not fully allow for the risks of the Tilt Renewables operating portfolio.”
Assumptions seem by Grant Thornton considered overly optimistic include:
• The market required rate of return, or weighted average cost of capital assumed by Northington for Tilt Renewables’ operating wind farms is too low. Uncertainty in the Australian political environment and energy market is not adequately reflected, nor is the future exposure to merchant energy prices that Tilt Renewables faces following expiry of existing revenue contracts. Northington’s assumption is also materially lower than the WACC Tilt itself used to test fair value of its operating wind farms for impairment in its 2018 annual report and the WACCs used by all independent research analysts who publish analysis on Tilt. The mid-point Grant Thornton WACC for NZ and Australian cash flows is 7.9% and 7.35% respectively, and if applied would decrease the Tilt valuation by 44 cents per share.
• The market required rate of return on equity used for valuation of the Dundonnell wind farm development is too low and leads to a value not supported by comparable transactions. Dundonnell, yet to be finally approved, is exposed to development risk and merchant price risk with more than 60% of its output currently uncontracted. It appears Northington does not allow for sufficient debt repayment from the project cash flows. These factors justify a materially higher required rate of return than Northington has assumed. If applied, the mid-point Grant Thornton Dundonnell cost of equity would further reduce the Tilt valuation by 18¢/share.
• Northington has assumed life of operating wind farms could be extended for a period of five years beyond their useful life, with increased operating and maintenance costs but no degradation in generation output. Tilt has no proven ability to operate assets beyond their design life, and Grant Thornton refers to international research which indicates generation performance of wind farms can degrade by a third over their useful lives.
• If Grant Thornton's revised market required rates of return for the operating and Dundonnell wind farms were applied in aggregate, Northington's implied valuation of Tilt would reduce to between $NZ1.87 to $NZ2.46/.
Infratil said the Northington report acknowledges risks surrounding their assessment of the valuation upside, concluding that: “there are a wide range of factors that will affect the potential timing and quantum of any value upside. Shareholders who do not accept the offer may also not realise any upside at all.”
Infratil continues to believe that the $NZ2.30 offer price is attractive and fair.
The Target Company Statement acknowledges that there is a risk that minority shareholders will not receive full value for their entitlements in the upcoming equity raising for the Dundonnell wind farm, if they choose not to participate themselves. The Target Company Statement also assumes that shareholders are indifferent to the future Tilt Renewables dividend yield. Infratil strongly encourages shareholders who are unlikely to participate in future equity raising, or who invest primarily for dividend yield, to consider whether accepting the Offer is appropriate for them.
The offer by Infratil and other major Tilt shareholder, Mercury NZ Ltd (NZX & ASX: MCY) is scheduled to close on October 15.