In reaction to Thursday's announcement that it has entered into a definitive agreement to be acquired by Vistra Energy Corp. (VST-N), Raymond James analyst David Quezada downgraded his rating for Crius Energy Trust(KWH.UN-T).
Calling Vistra a "logical" buyer and the $7.57 per trust unit valuation of Crius "reasonable given risks," he lowered the stock to "market perform" from "outperform."
"Having recently completed and integrated the acquisition of Dynegy, Vistra's generation footprint had expanded to the U.S. Northeast where Crius' has a large retail footprint (70 per cent of the company's 1.3 million RCEs)," said Mr. Quezada. "Vistra's announced strategy is an integrated retail-wholesale model and a slide deck issued by the company noted this transaction improves the company's generation to load match to 45 per cent while also bringing Crius' retail marketing capabilities and relatively high margin customer book. The $7.57/sh takeout price equates to a $328-million price tag (plus $108-million assumed debt) and represents a 4.4 times 2019 EV/EBITDA by our estimates. Factoring in expected synergies, Vistra estimates the multiple at 3.6 tims. While ostensibly low we believe these multiples are reasonable considering the headwinds facing Crius' municipal aggregation customers and regulatory challenges the company has faced. Transaction closing is expected in 2Q19."
Mr. Quezada said he does not anticipate regulatory obstacles and thinks the probability of a competing bid is low.
His target for Crius units fell to $7.50 from $9. The average target on the Street is $8.21.
"While the takeout price comes below our target we believe the 38-per-cen premium to [Thursday's] close is attractive to unit holders particularly considering challenges facing the municipal aggregationportion of Crius' portfolio," the analyst said. "Moreover, we believe the strategic benefits of the complementary relationship between Crius' retail energy footprint and Vistra's generation assets makes Vistra a logical buyer. While expected improvements in EBITDA guided to by management may have provided upside in the stock over time, we did not see the communicated targets as a slam dunk."
Meanwhile, Desjardins Securities' Bill Cabel moved Crius to "tender" from "buy" with a $7.57 target, down from $9.
Mr. Cabel said: "In our view, the offer is a bit light, but we acknowledge that 2018 was a volatile year of restructuring for the company following lawsuits and unitholder activism in 2017. As a result, there is a lack of institutional ownership and we have seen significant turnover in the unitholder base. We believe that the 38-per-cent take-out premium will prove too attractive to holders and, while not optimal, we believe holders should tender to the offer."