Zimmer Partners was the AQN institutional investor Canadian utilities with ambitious growth plans have found a new best friend in Zimmer Partners LP, a U.S. hedge fund that is paving the way for new infrastructure by making serious commitments to stock sales.
Algonquin Power & Utilities Corp. is the latest domestic player to benefit from founder Stuart Zimmer’s seal of approval. Back in December, the Oakville, Ont.-based company announced a five-year expansion strategy that called for $9.2-billion in spending on projects that include 10 wind and solar facilities in Quebec, Saskatchewan and eight U.S. states. Analysts calculated Algonquin needed to raise $350-million from stock sales each year to achieve its goals, an appetite for capital that didn’t go away when the world caught the novel coronavirus.
Enter Mr. Zimmer and his US$9-billion fund, which focuses on investments in energy and utility stocks. In early July, Algonquin landed a $350-million order for its shares from what it described in a press release and filings as a single U.S. institutional investor. Investment bankers working on the transaction confirm the investor was Zimmer Partners; the company and the hedge fund declined to comment. (The Globe and Mail is not identifying the investment bankers as they were not authorized to speak publicly about the deal.) Over three decades of investing in utilities, Mr. Zimmer has earned a reputation as a committed and supportive shareholder.
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With a large initial order in hand, a team of dealers led by Scotia Capital and CIBC Capital Markets offered an additional $550-million of Algonquin stock to the public. This portion of the bought deal was subsequently boosted to $633-million, on the back of strong demand from individual investors, meaning Algonquin raised a total of $983-million. The company funded roughly three years of its five-year growth plan in one transaction.
The deal marked a dramatic debut for new chief executive Arun Banskota, who joined Algonquin as president in February from a U.S. power company and took over as chief executive from founder Ian Robertson in mid-July. In a press release, Mr. Banskota said the stock sale covers all of this year’s spending plans and “puts the company in a position of strength as it looks to soon begin executing on the 2021 portion of its capital program.”
The size of the transaction did not go unnoticed on the Street. “Although we were not surprised by the company raising equity at this time, we were not expecting an equity offering of this magnitude,” Nelson Ng, an analyst at RBC Dominion Securities, said in a report.
Analysts expressed much the same sentiment back in December, when Fortis Inc. sold $500-million of stock to Zimmer Partners as part of a $1.2-billion share sale, raising cash needed for the Newfoundland-based company’s planned $18.3-billion of projects over the next five years.
Zimmer Partners isn’t the only major institution willing to back Canadian infrastructure plays with big dreams. Brookfield Asset Management Inc. recently bought $350-million of preferred shares from Superior Plus Corp., money the propane distributor plans to spend on acquisitions. And a number of pension plans, including the Ontario Municipal Employees Retirement System, Alberta Investment Management Corp. and the Caisse de dpt et placement du Qubec, have made significant investments in publicly traded utilities.
Why are Zimmer Partners and other institutions willing to step up? On the surface, Zimmer Partners and public investors paid the same amount for Algonquin stock, buying shares for $17.10 each – the stock was trading at $17.52 prior to announcement of the deal, so all the buyers were getting new shares at a slight discount. Regulatory filings also show Algonquin’s institutional investor agreed to hold its stock for at least 45 days, precluding flipping the stock for a quick profit.
However, regulatory filings show Algonquin paid the hedge fund what’s known as a “commitment fee” equal to 2 per cent of the value of the shares it bought, or $7.2-million. Fortis paid a 1-per-cent commitment fee, or $5-million, when it sold shares to Zimmer last year. That small fee is effectively a discount for the institution – similar to buying shares for well below where they are trading – which helps these investors beat their performance benchmarks.
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From Algonquin’s point of view, the commitment fee is well worth paying, as it is only half the 4-per-cent commission charged by dealers on the bought deal portion of the offering. And it allows an ambitious Canadian utility with a newly minted CEO to plan for growth during a pandemic with almost a billion bucks in the bank.