Altagas Ltd. (TSX:ALA) shares have been weak with a decline of ~17% year to date. Is it time to give up on Altagas? I don’t think so.
If we trace back the price action, most of the selling occurred in late January, around the time Altagas announced its subscription receipt offering.
What are the subscription receipts again?
The subscription receipts were a means to raise funds for the pending acquisition of $8.4 billion WGL Holdings. Comparatively, Altagas has total assets of nearly $10.1 billion. So, this is a huge acquisition.
About 16% of the original subscription receipts were sold in a private placement to a pension plan for Ontario’s municipal employees, which gives a vote of confidence that Altagas may be an investment suitable for retirees and income investors. After all, the stock yielded nearly 6.8% at the time. In total, Altagas raised ~$2.6 billion of gross proceeds from the receipts.
The receipts pay dividend-equivalent payments similar to the dividends for the common stock, except that the payments comprise of interest and return of capital and are not eligible dividends.
If Altagas acquires WGL successfully, presumably by the end of the first half of 2018, the receipts will convert to Altagas common shares. If the acquisition fails, the receipt holders will receive $31 per receipt back.
Yet the receipts traded at $27.90 at the market close on Thursday — a whopping 10% discount from $31. Why is that?
Other ways of raising funds
You’ll notice that after subtracting the ~$2.6 billion from the subscription receipt proceeds, Altagas is still short by ~$5.8 billion. Here are some other ways Altagas has been raising funds for the acquisition.
The company has a ~US$3 billion (~CAD$3.75 billion) bridge facility which will be available for 12-18 months following the closing of the acquisition. In the meantime, it costs the company to have this available, though the financing cost is low, equating an annual rate of ~0.4%.
As it made progress on the acquisition, the company had also begun selling some of its assets to raise funds, which will reduce the company’s earnings and cash flow as the sales occur. These assets include large-scale, gas-fired power-generation assets in California and some smaller non-core assets.
Altagas is also open to other forms of financing, including offerings of senior debt, hybrid securities, preferred shares, or convertible debentures — basically, whatever makes the best sense at the time it needs the funds.
In summary
Altagas is a transforming company. It’s making a huge acquisition. To do so, it is using multiple means to raise funds, which adds uncertainty in the near term with the potential of increased debt and dilution of current shareholders.
However, I don’t think it’s time to throw in the towel yet. Upon completion of the acquisition, management expects that it will have more than $22 billion of assets and over 1.7 million rate-regulated gas customers, which will improve the stability of its earnings.
Currently, the depressed shares offer a juicy yield of 7.5%. Management has shown commitment to its dividend, which it has raised for five consecutive years. Further, management will revisit the dividend in the fourth quarter. If they increase the dividend, the shares will likely get some love from the market again.
