Event Trade: ERM Power (EPW:ASX)
8 Nov 2019
By Shannon Rivkin
The EPW Event trade was first recommended as a buy on 22 August 2019. Below are each of the updates related to this trade in chronological order.
Current advice: Await Payment
Update – 08 November 2019, 03:41pm
We had the scheme meeting for EPW and, as expected, the deal was overwhelmingly supported by shareholders. While it still requires federal court approval, the shareholder vote is effectively the last condition of note.
The stock will cease trading at the close of trade on 12 November with payment due on 29 November. Shareholders will be paid $2.335 in cash as well as a fully franked special dividend of $0.085. Including the $0.045 final dividend as well as franking credits, members will end up receiving total gross proceeds of $2.52 which is a handy arbitrage of 2.9% that will end up being held for roughly three months.
Update – 15 October 2019, 09:53am
EPW members should by now have received their Scheme Booklets. Given the landscape in the power generation sector, we had hoped to see a competing bid emerge for EPW like it did with Pacific Energy (PEA) but to date things have been quiet. It is possible that no would-be bidders like the idea of going up against energy behemoth Shell but with a worst-case profit we remain in a good position. Members have already received a $0.045 fully franked dividend – paid on 9 October – and are due to be paid $2.42 per share which includes a $0.085 special dividend. Including the dividend we have already received, shareholders will receive total gross proceeds of $2.52 per share.
The Scheme Meeting is due to be held on 8 November with votes due in two days before. To vote, you can visit the registry at https://investorcentre.linkmarketservices.com.au/Login/Login and you will need your HIN (shown on your proxy form) to access your shareholding. Once logged in, we recommend members vote ‘FOR’ all proposed resolutions regarding the scheme of arrangement. As this is a vote and not an acceptance, you will not be compelled to sell your shares to Shell if a competing offer emerges so there is no downside to voting early.
Original Recommendation – 22 August 2019, 01:34pm
We recently recommended buy into Pacific Energy Ltd (PEA) and today we have seen another deal for a power company in EPW as it has announced that it has signed a Scheme Implementation Agreement (SIA) with global energy giant Shell. The deal comes out of the blue unlike PEA which had effectively conducted an auction and offers an investment opportunity for a few reasons.
The deal signed with Shell comes with limited conditionality and has the support of the board and major shareholder, so it is highly likely the offer of $2.465 per share will succeed in the current circumstances. This is good for us as we can quantify our likely downside.
The upside in buying into EPW comes in two ways. Firstly, and like PEA, there will be some franking credits that will flow to shareholders which improves the gross return. All up, EPW will be able to pay up to $0.13 in fully franked dividends which contributes $0.056 in franking credits which means the total proceeds of the current offer will be $2.52 for those able to take advantage of the franking credits. The stock is currently trading at $2.45 so there is roughly 2.8% in this arbitrage if we see no other action.
The second reason we could see upside is that, like with PEA, there could be interest emerging from elsewhere. The deal with Shell has put EPW in play and there is clearly a land grab in power generation in Australia at the moment. QIC outbid Canadian pension fund OPTrust who could easily shift its attention to EPW. Either AGL Energy (AGL) or Origin Energy (ORG) could cast an eye given the likely synergies they would yield through a deal. To be able to buy in at a discount with the chance of higher bids is very appealing.
We therefore recommend members buy EPW at no higher than $2.45 for a low-risk, short-term investment.
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