Live From the Desk 12

M&A Update: Capital Power Income LP Closes

We thought that given the unique nature of this deal and the surprise bump we received upon closure we would share with you this particular situation. The acquisition of Capital Power Income LP (CPA-u) by Atlantic Power (ATP) recently closed and it’s a good example of how technical details can sometimes work in our favour to enhance returns. The position was held with significant weight in the Vertex Fund, Vertex Growth Fund and Vertex Enhanced Income Fund, with the latter two being long only positions in CPA-u.

This past June ATP announced that they would acquire CPA-u, with unitholders being offered either $19.40 cash or 1.3 shares of ATP for each CPA-u share held. The assumption was that elections would then be prorated such that it would be roughly 50% cash and 50% stock in aggregate. Ignoring taxes, a rational holder of CPA-u would elect cash if ATP was below the indifference point of $14.92 (=$19.40/1.3) and elect stock otherwise. The technical detail was that people who didn’t submit an election were defaulted to receive ATP stock. At the time of the election, ATP was trading below the indifference point ($14.92), meaning that people who had not elected a choice ended up with stock consideration worth less than the cash option. As well, some holders chose stock in order to get a tax-free roll over.

The result, for people such as ourselves who elected cash, was that they received a greater proportion of the merger consideration in higher-valued cash. This could be due to the fact that there was a high retail base who owned CPA-u (due to the high dividend) and aren’t as familiar with corporate action procedures. Additionally, the deal was not available to non-Canadians excluding it from savvy arbitrageurs. That being said, for holders of the arbitrage spread such as ourselves (in the Vertex Fund), we not only received extra cash, but we came out net short a stock which had declined 10% below the indifference price. So, it was a win-win scenario in a difficult market environment.

On a similar note, the M&A strategy weight in the Vertex Fund is now up to 44%. In the Vertex Growth Fund it is 31% (long only, high conviction deals).

until next time. . .

@The Vertex Team

For information on this update or the funds we offer, please contact your local sales representative:

Noel Dattrino
(Western Canada)

Michael Lindblad
(GTA and Eastern Ontario)

James Wilson
(GTA and Western Ontario, Maritime Canada)