Wind turbines are bathed in the first rays of sunlight at the Saddleback Ridge Wind Project, in Carthage, Me., on March 20, 2019.Robert F. Bukaty/The Associated Press
Beaten-up renewable power producers are looking far more enticing after Canadian pension fund giant Caisse de dépôt et placement du Québec struck a deal to acquire Innergex Renewable Energy Inc. INE-T this week.
If sophisticated institutional investors are snapping up companies that generate power from wind, solar and hydro, should small investors take the hint?
The renewables sector has been out of favour for several years, initially falling victim to disappointing growth, then high interest rates. This year, the U.S. policy shift away from renewable energy appeared to give renewables a final raspberry salute.
By Jan. 22, days after Donald Trump began his second term as U.S. President, the iShares Global Clean Energy ETF, an exchange-traded fund that invests in dozens of companies globally and serves as a proxy for the sector, settled at a new multiyear low: down 67 per cent from its recent high in 2021.
That’s why the deal for Innergex – which owns and operates hydroelectric facilities, wind farms, solar farms and energy storage facilities in Canada, the United States, France and Chile – stands out: The Caisse is signalling that the stretch of dismal performance for renewables is yielding bargains for long-term investors.
The pension fund agreed to pay $13.75 a share for the company – 58 per cent above the stock’s closing price on Monday – or a total of $10-billion including debt.
The deal values Innergex, based in Longueuil, Que., significantly higher than its Canadian peers in the renewables sector, according to Robert Hope, an analyst at Bank of Nova Scotia. The immediate takeaway is that more deals could follow.
According to Mr. Hope, standout takeover candidates include Northland Power Inc., which is one of the cheapest stocks in the sector based on popular valuation models; and Boralex Inc., which is 15.3 per cent owned by the Caisse and would make a good strategic fit with Innergex.
“At the very least, we believe this transaction highlights the true value of renewables assets, which in our view the public markets are mispricing currently,” Mr. Hope said in a note.
Other observers have expressed similar sentiments.
Connor Teskey, chief executive officer of Brookfield Renewable Partners LP, believes that demand for renewable assets is strong – particularly with the rollout of artificial intelligence-driven data centres – even though share prices are low.
This mismatch creates opportunities for deep-pocketed investors such as Brookfield.
“We expect to be very active this year from a growth perspective,” Mr. Teskey said during a conference call with analysts at the end of January. On Feb. 24, Brookfield announced a deal to acquire the U.S. renewables assets of National Grid PLC for US$1.7-billion.
The second takeaway from the Innergex deal is that sophisticated investors haven’t given up on the long-term potential for renewable assets.
The bullish case still goes like this: Renewables are generally cost-competitive with fossil fuels, and will grow even more so over the next three decades, according to consultancy Wood Mackenzie, as technology improves and development costs decline.
Furthermore, the United States is just one region in a world that is hungry for sources of clean energy and Mr. Trump’s first presidential term actually coincided with a ripping rally for renewables. In any case, the White House may have little influence over what assets are developed on private land.
But whether the Innergex deal blossoms into a full-on rebound for the sector is an open question.
Though Boralex and Northland Power shares have rallied about 10 per cent each since the deal was announced on Feb. 25, the diversified iShares Clean Energy ETF declined this week. The fund, dominated by big players such as First Solar Inc. and Vestas Wind Systems, is up just 2.8 per cent from its January low.
This amounts to a collective shrug on the part of investors. It suggests that they remain unconvinced that the global renewables sector is embarking upon a turnaround.
It’s entirely possible that the Caisse fails to influence other buyers. After all, the deal involved a Quebec-based pension fund making a brave move on a Quebec-based company, which might not resonate beyond Canada.
It may have overpaid for Innergex, given that rival bidders haven’t emerged and the share price hasn’t rallied above the takeover offer. A final note of caution: Like any investor, the Caisse could have made a bad bet.
Nonetheless, the Innergex deal offers a compelling reason to take a fresh look at renewables. The stocks are cheap and out-of-favour, and sophisticated investors are taking notice.