Algonquin Power & Utilities Corp T.AQN

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Starboard Supportive of Renewable Sale But Looking for a Board Refresh

OUR TAKE: Neutral. Starboard Value LP, Algonquin’s largest shareholder at ~9%, informed the company that they would be delivering a notice to nominate three director candidates at the upcoming Annual General Meeting (AGM) on June 4th (link). In its letter Starboard expressed support of: 1) the sale process of its unregulated business, 2) its ongoing CEO search, and 3) the interim-CEO. Algonquin noted that the company will review the proposed nominees in accordance with the company guidelines. From our point of view, it appears that both Starboard and Algonquin have a common goal that would see the company sell its renewable business and use proceeds to reduce leverage and buy back shares. Our model assumes the renewable power business is sold at year-end 2024 with proceeds used to reduce leverage and buyback shares (link).

We see Algonquin trading at 12.4x 2025E P/E, which would be a discount to Fortis at 16.0x, Emera at 14.3x, and Hydro One at 20.6x. We believe that an outcome in its renewable power sale process, which could come mid-2024, will be a key driver of the shares over the next six months.

Looking for the same end point? As a reminder, Starboard sent its first public letter to the Board in early July 2023 (link), in which it noted that a sale of its unregulated renewable energy business could lower leverage and improve valuation. This was followed up by a more fulsome presentation in October 2023 (link). Along with Q2/23 results in August 2023, Algonquin announced that it would look to monetize its renewable power business as well as a CEO transition. As we noted earlier it appears that both Starboard and Algonquin have a common goal that Algonquin transitions to a pure-play utility model with lower leverage through the sale of its renewable power business. That said, Starboard noted that after significant engagement the company it would look for a Board refresh at this critical juncture.

Three qualified Board nominees. Starboard intends to nominate what we view to be three high profile director nominees. These include: 1) Christopher Lopez — Executive Vice President, Chief Financial and Regulatory Officer at Hydro One, 2) Brett C. Carter — most recently served as the Executive Vice President and Group President, Utilities and Chief Customer Officer of Xcel Energy Inc., 3) Robert A. Schriesheim — a multiple time public company director, CFO that Starboard describes as an expert in restructuring and complex financial transactions.