Power to the people is the cry when energy prices spike. Praise be that the stealth philanthropists of KKR are stepping in to keep the lights on. The latest bright idea from the US private equity group is a cash offer for ContourGlobal. The offer values the London-listed power generator at £4.9bn ($6.1bn) including net debts. A generous 36 per cent premium means this is yet another US buyout that UK investors will struggle to say no to.
The appeal for KKR is simple. ContourGlobal’s portfolio of power-generating assets ranges from coal plants in Europe to wind farms in Brazil. These offer stable long-term cash flows, of which about 80 per cent are linked to inflation.
The problem for public market investors is that the share price has been stuck below the listing price for the past four years.
A complicated operating model, a small free float, a dependence on fossil fuel and risky leverage are all red flags for cautious UK income investors. But the group has a good record of buying assets and increasing earnings. Acquisitions have roughly doubled generating capacity since 2015. A stake sale in 2017 helped fund this. The portfolio’s costs grew at half the rate of ebitda earnings in the six years to 2020, according to Liberum.
The result is plenty of cash for shareholders. Those that purchased shares at the float have made a 4 per cent annual cash return from dividends of £356mn ($477mn) since. That rises to a total annual return of 4.8 per cent inclusive of the offer price of 264p per share.
Investors may be less thrilled to learn that KKR is paying $80mn less for the expanded ContourGlobal than they did at IPO, adjusting for dollar movements. ContourGlobal’s expected dividend yield is almost 8 per cent on KKR’s takeout offer, more than double the global sector. That suggests the stealth philanthropists could pay more. But with 73 per cent of the shares already behind a deal, a US buyout group has the whip hand once again.
City Bulletin is a daily City of London briefing delivered directly to your inbox as the market opens. Click here to receive it five days a week.