Moore Capital seen as key to TEP/Leaf merger

17 February, 2010
The merger of Trading Emissions Plc (TEP) and Leaf Clean Energy was hanging in the balance Wednesday, with management believed to be wooing a key investor in the run-up to Friday’s extraordinary general meeting (EGM).
Last week, two major TEP shareholders announced that they were opposed to the merger – Moore Capital, with 16% of TEP, and Scottish Widows Investment Partnership (SWIP), holding 9.3%.
TEP shareholders representing 75% of those shares that are voted need to support the merger for it to go through. However, despite this apparent blocking minority, the EGM is going ahead – leading to speculation that the terms of the deal could be changed to persuade at least one of the opposing shareholders to support it.
“I haven’t been contacted by management since last week,” Johnny Russell, investment director at SWIP, told Carbon Finance. “If I was key to the deal, the terms would have been presented to me ... What’s interesting is the fact that the EGM is going ahead.”
Moore Capital could not be contacted for comment, and the managements of clean energy private equity investor Leaf Clean Energy and carbon fund manager TEP declined to comment, beyond reiterating their view that the merger has “strategic and financial logic” for the two companies. In December, the boards of the two London-listed companies announced plans to seek an all-share merger, on a “formula asset value basis”. On 13 January, when the scheme document was posted, this valued TEP at 148.9p ($2.34) per share – a considerable premium to TEP’s 94.5p share price – and Leaf Clean Energy at 100.2p.
However, TEP shares subsequently dropped to 82.5p on 9 February. Meanwhile, Leaf shares, which had traded at 96.5p almost all of last year, had fallen as low as 57.5p by late January.
Both shares rallied, somewhat, on news last week of SWIP and Moore Capital’s opposition, to 91p and 62.5p, respectively.
“The major thing throwing this for a six is that Leaf’s share price had gone from £1 to 57p,” said Gus Hochschild, an analyst at Mirabaud Securities. “What they had been offering TEP has sunk by 40p. The pricing of the merger is out of kilter.”
“The advantage always accrued more to Leaf shareholders,” said Andrew Shepherd-Barron, at brokers KBC Peel Hunt. “There are some synergies, but not enough to get the juices flowing.”
SWIP’s concerns, said Russell, were that the relatively transparent assets held by TEP – cash and carbon credits – would be diluted by the “longer-duration, harder-to-value” private equity renewable energy investments made by Leaf.
“If TEP is independent, I can invest at 85p today and get 150p over the three years” to the end of the Kyoto Protocol period, he said. “That’s a very attractive return.”
Meanwhile, Adam Forsyth, an analyst at the Matrix Group, said that “you could argue that the merger is locking in a low value of the carbon price,” given that TEP’s net asset value would rise if carbon prices rallied.
Moore Capital, meanwhile, had supported the merger when it was first proposed by management but, in a statement reported by Bloomberg last week, said: “It is Moore Capital’s current intention not to vote in favour of the merger.”
The use of the word “current” has led to speculation that Moore is seeking more favourable terms. As Carbon Finance went to press on Wednesday afternoon, TEP and Leaf Clean Energy were due to announce the terms of the merger via the London Stock Exchange.
“One of the things we have speculated on is that the managements could offer a distribution of some of the cash in both TEP and Leaf, without damaging their business plans,” said Forsyth. Mirabaud puts the unrestricted cash balances of the two firms at £182.2 million.
Alternatively, management could alter the exchange ratio at which TEP and Leaf shares would be converted into shares in the merged company, more in TEP’s favour.
“The Leaf and TEP boards have some flexibility, but to make it work, they need to offer more to TEP shareholders,” added Forsyth. “The question is, if they do, would they get the support of Leaf shareholders?”