Post by
Meesha1 on Oct 24, 2023 4:47pm
Other Analyst Comments
TD was positive on the transaction but kept their target price of $11.50 unchaged.
Stifel’s Ian Gillies trimmed his target to $12 from $13 with a “hold” rating.
“The company intends to use its partnership with Oaktree to accelerate growth of this business in the U.S.,” said Mr. Gillies. “We remain concerned that the capital injection will be used to fund future losses on the four large problem projects that need to close over the next two years and that the company has sold off a portion of another strong operating asset. The deal also brings added complexity to a stock that already has many moving parts. We are reducing our target price ... as we have lowered our target EV/EBITDA to 4.0 times from 4.5 times due to increased complexity of the business.”
I have to respectfully disagree with posters that are calling this a prelude to a Brookfield takeover. The stock is cheap and as such is always a potential take-over target, but if they were interested in doing so they would be building a stake in Aecon common while the stock is under $11. Lets look at what they've actually done. First of all Howard Marks, chairman of Oaktree has been very vocal recently about opportunities in the credit markets that offer equity like returns without the equity risk. Thats what this looks like to me.
They are literally creating a distinct legal entity (Aecon Utilities) so they are not exposed to the rest of Aecons business and liabilities. And within such entity, they are NOT buying a 27% for $150MM. They are buying a preferred that pays them 12% for 3yrs and 14% for the next 4 yrs. In addition, as if that wasn't good enough already, they then have the option of converting the preferred (at no further cost) to 27% of the equity of Aecon Utilities. Now we don't have alot of clarity on the Utilities business but from what they've told us, its had an 8.5% EBITDA margin over the last few years and its revenues have a grown at a 19% CAGR. Everyone is getting excited about the conversion price being 9.0x TTM EBITDA for the Utilities business, but they aren't doing that today. Over 7 yrs they will almost recoup their investment in preferred dividends and then can easily sell it to a third party when the EBITDA has more than doubled. heck apparently they can even force Aecon to IPO the utilities entity:
Following the seven-year anniversary of the Investment, Oaktree may sell its Investment, subject to a right of first offer in favour of Aecon, or may require Aecon, at Aecon’s election, to either (i) initiate an IPO process and/or (ii) initiate a sale of Aecon Utilities or (iii) purchase the Preferred Equity for cash at a price equal to the greater of (A) the accreted value of the Preferred Equity and (B) the as-converted value of the Preferred Equity.
Make no mistake, they are getting their money back with interest. Can someone explain to me what risk Oaktree is taking? So why would Aecon do them such a favor? Well, this transaction gave them a good headline (+9% yesterday). I fear its because they have some bad news to announce with earnings.
The amount of the investment is not a coincidence. They have $150MM convertible debenture maturing soon. I thought they would access their credit facility to fund that. Instead they have done this bizarre transaction. This is the most expensive capital I've seen in a very long time. It tells me they need the undrawn room on the credit facilty for future LSTK losses.
I hope I'm wrong and wish you guys good luck tomorrow. I still think there is a great trade here somewhere, but since I didn't aquire much of a position in the last couple of weeks so I got out this morning @ $11.30. This deal just doesn't sit right with me.
Comment by
babybunny on Jan 14, 2024 2:18am
My thoughts exactly. Aecon got taken to the cleaners by Brookfield. I was seriously considering an investment in Aecon until I delved into the ugly details of this transaction.