Energy, Materials, and Utilities
According to a report by Bloomberg, Pattern Energy (NASDAQ:PEGI) has drawn interest from several potential suitors that would like to acquire the renewable energy company. Among the interested parties is Brookfield Asset Management (NYSE:BAM), which wants to merge Pattern with its majority-owned renewable arm TerraForm Power (NASDAQ:TERP). Pattern Energy has since confirmed the reports, though the company made it clear that it hasn’t reached a deal and might not agree to a transaction.
It’s no surprise to see that Brookfield has approached Pattern about joining forces with its renewable energy yieldco. That’s because the combined companies would be able to leverage its larger scale to reduce costs and improve its profitability and dividend growth profile.
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An excellent track record
Brookfield and its hydropower-focused subsidiary Brookfield Renewable Partners (NYSE:BEP) took control of TerraForm Power in late 2017 after the latter’s former parent went bankrupt. The companies quickly implemented a strategy to turn around the struggling TerraForm, which had a bloated balance sheet and cost structure. Their plan has paid big dividends, as TerraForm’s financial results have improved dramatically over the past two years.
The actions TerraForm has undertaken have set it up for sustainable success. The company was able to reinstate a high-yielding dividend last year, which the company is on track to grow at a 5% to 8% annual rate through at least 2022. Meanwhile, thanks to the support of Brookfield Renewable, TerraForm was able to make a needle-moving acquisition last year. The company has since followed that up with another deal, which it’s funding by following the blueprint Brookfield laid out.
A similar opportunity
Pattern Energy isn’t in quite as rough shape as TerraForm was when Brookfield took control a few years ago. However, the company still fits the profile of a Brookfield acquisition target. That’s because Pattern Energy’s financial profile is a bit weak as a result of its aggressive growth in the years following its IPO in 2013. The company’s initial focus was on expanding the size of its portfolio so it could rapidly increase its dividend.
However, Pattern Energy was eventually unable to continue that strategy because investors wouldn’t provide it with the capital needed to fund growth. That’s because its financ