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RE:article supports voting against

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Atlantic Power: Preferred Shareholders Should Vote Against The Proposed Takeover Unless Better Terms Are Proposed

Jan. 21, 2021 5:54 PM ET

Summary

 

• Atlantic Power Preferred Shareholders to receive C$22 per share (vs. $25 per share face value).
• Atlantic Power Preferred Shareholders will not be entitled to a pro rata dividend.
• Atlantic Power Preferred Shareholders are being treated the least favorably vs. all other parts of the capital structure.
• The quorum requirement is way less for Preferred Shareholders.
• Atlantic Power Preferred Shareholders should vote against the proposed takeover.

Situation Overview

I Squared Capital has signed definitive agreement with Atlantic Power (AT) to acquire all of Atlantic Power outstanding securities, including the Common Shares, 6% Convertible Debenture, the 5.95% Medium Term Notes, and three series of Preferred Shares (Series 1, Series 2, Series 3 is only traded on Canadian exchanges).
Below specifies the consideration for each security:

Source: Presentation
Specifically, the Common Shares are receiving a 48% premium to its 30-day VWAP. The holders of the Convertible Debenture are receiving consideration above par (including a make whole premium) of ~106% of the face value. The Medium Term Noteholders are receiving 106.071% of par, plus 0.25% of principal in the form of consent fee. Both the Convertible Debenture and the Medium Term Notes are receiving accrued and unpaid interest up to, but excluding the closing date of the transaction.
Preferred shareholders are receiving $22/share, and there will not be a pro rata dividend in the event that the closing occurs mid-quarter.

Source: Investor Q&A
In addition, the quorum requirement (i.e. the minimum percentage of each security voted) is 10% for the Preferred Shares vs. 25% for all three other securities. To be clear, I understand that the 10% quorum requirement is dictated by their prospectuses - I'm just pointing out the difference.

Currently the three Preferred Shares are trading 10-15 cents below the C$22 take out price. The series 1 and 2 pay roughly 30 cents/quarter. Assuming the transaction proceeds as proposed, new investors in the preferred shares are receiving 30 cents of dividend, 10 cents capital appreciation, on C$21.90 capital invested for a holding period return of 1.8% or ~5.4% annualized assuming the deal takes four months to complete from today.

Preferred Shares Are Treated Unfairly

First, Common Shares Are Receiving a Huge Premium While Preferred Shares Are Not Made Whole. This is obvious to one with the slightest idea about capital structure. In essence, the management is asking the Preferred Shareholders to take a 12% haircut that transfers value directly to the most junior part of the capital structure. This is simply not acceptable - the junior part of the capital structure shouldn't receive a dime before the more senior part of the capital structure is paid back in full.
Second, not paying pro rata dividend up to the closing date is an off-market practice. The most recent acquisition that had a preferred shares involved that I can think of, Simon Property/Taubman, the preferred shareholders were redeemed at $25/share, plus accrued and unpaid dividend.

Source: PR
For a Canadian example - Northview Apartment REIT paid "Stub Distribution" between month-ends, and the common stock dividend isn't even contractual like the dividend on preferred shares.

Source: SEDAR

Preferred Shareholders Should Vote Against

As the management and the acquirer are asking the Preferred Shareholders to take a meaningful haircut to their claims AND they plan to short change Preferred Shareholders by not paying pro rata dividends, I strongly recommend Preferred Shareholders to vote against the deal.
Preferred Shareholders must leverage on the fact that the acquisition requires 66 2/3% of the votes cast by the Preferred Shareholders. Note that by design only 10% of the aggregate number of Preferred Shares (6,864,863 shares as of Q3-2020) or 686,486 shares need to be casted, and the 66 2/3% approval rate is calculated based on the votes against, not the total preferred shares outstanding.
Lastly, just to put this into context: the company is paying C$151.0 million to take out the Preferred Shares at $22/share. Paying the face value of $25/share pumps the consideration to C$171.6 million, which is a 1.69% increase to the enterprise value of US$961 million (at 1.2654 exchange rate), but it would be a deservingly 13.6% improvement for the Preferred Shareholders.

Conclusion

Once again Canadian Preferred Shareholders are being bullied again (remember Rona?). The discount to par value and the lack of interim dividend are appalling. Don't let them disrespect us - it takes everybody to speak up to protect your own interest.