“Bittersweet” is the word I used to describe the acquisition of Atlantic Power (TSX: ATP), and also the words that James Moore used as well in his conference call.
“Bittersweet” is also the word I’m going to use to describe my exit out of the stock yesterday.
I did not view the chances of a higher bid to be likely and I should have pounded my shares out of the exit a couple days after the merger was announced (which got up to a high of US$3.06, compared to the proposed cash acquisition of US$3.03 – this was on January 20th and the merger announcement was on the evening of January 14th). Instead, I took a ~5% hit from the proposed price and paid a fairly hefty merger arbitrage spread.
The reason was simple – they announced they received 90% of the medium term note holders’ consents for the merger, but the following paragraph was in yesterday’s press release:
Atlantic Power also announced today that the meeting (the “Debentureholder Meeting”) of holders (“Debentureholders”) of its 6.00% Series E convertible unsecured subordinated debentures due January 31, 2025 initially scheduled to be held on March 18, 2021 at 10:00 a.m. ( Toronto time) is being adjourned to Wednesday, April 7, 2021 at 12:00 p.m. ( Toronto time) to allow additional time to solicit proxies.
This is not good news.
All parts of the capital structure require a 2/3rds vote to approve the merger. Quorum is 25%, which should not be the limiting constraint at this point.
If proxies were received that already expressed approval for the merger to that quantity, the meeting would have been held and one more hoop would have been jumped through for merger completion. It is a virtual guarantee that an insufficient number of votes or an insufficient number of affirmative votes has been received to date.
If they held the meeting and did not receive the 2/3rds supermajority, the vote would have failed and the merger would have to been renegotiated (which leads to all sorts of other risks).
The adjournment of this vote does not bode well for the overall merger.
We do not know how many votes have been received in favour or against.
The risk has been elevated significantly leading up to the April 7th shareholder vote.
Although iSquared is raising debt financing in preparation for the merger, if the entire capital structure of Atlantic Power does not go along with this, iSquared has the right to terminate the merger.
This will most certainly involve the common shares trading back down to the US$2.00-$2.20 level (and the preferred shareholders will most certainly head down to around the $17-18 level).
Just imagine you are the management of the company and the merger fails due to a negative vote. Mentally, you’ve already checked out and are preparing to transition out of the company. Instead, your shareholders (or possibly in this case, your debtholders) have blocked your exit. What do you do? It’s not an easy position to be in. You can sell your stake in the company (Moore owns more than a million shares and was prepared to receive a significant golden parachute) and get out of there. Another option is staying on board and just keep status quo and clipping paycheques while the stock languishes.
Another possibility is that iSquared will pay off the debentureholders. Indeed, given how ATP.DB.E is virtually guaranteed to get paid out no matter what happens (maturity is January 2025), why not be a pain in the ass and ask for more?
I’d estimate the risk of a failed vote happening to be about 20% at present. Not too high, but enough for me to punch out the clock and take the bird in the hand rather than two in the bush. To say the least, this has been a sloppy exit, but at least the rapidly depreciating cash that is sitting in the account will eventually find a better home.
