Let’s start with the disclaimers, and then I’ll go on to the ‘claimers’.
I am not experienced in the area of power generation, utilities and general merger financial analysis. I do however have experience with mergers and acquisitions, several larger than this one, in the area of biopharmaceuticals. I also spend a fair bit of time looking at, and understanding, the reasons that mergers and acquisitions succeed and fail.
In general acquisitions and mergers do not have a great track record in terms of overall success. Well south of 50% of these transactions succeed when judged as to whether the new combined entity is more valuable post merger than the entities were pre-merger. But there are successes.
Taking a look at Parry Sound Hydro (PSH) as it now stands reveals a corporation that needs to reinvest in its assets. This realization probably was the reason the board of PSH started looking at updating and expanding the power generation capacity of the Cascade Street facility more than a decade ago. The power plant was in need of significant maintenance and upgrades. The thinking as I understand it was to upgrade the generating capacity of the facility at the same time. Rates for green energy were attractive and it was pretty obvious that money was literally spilling over the dam.
Information on the why and what of the proposed merger have been made available on the Town of Parry Sound website (about a third of the way down that page). I won’t do a rehash.
I’ve looked at the documents and my sense is that it is a fair deal for all of the parties involved.
- The Town really can’t afford to take on the cost and risk of the project to refurbish and expand power generation capacity; it’s on the order of $15 million.
- There are ‘efficiencies’ in head office operations for the merged operation, notably regulatory filings and billing.
- Field resources can be spread over a wider base to improve efficiency and effectiveness. These resources include personnel and equipment.
- PSH really doesn’t have the personnel to oversee the facility upgrade and expansion. This is a specialized project management type skill that Lakeland either has in-house or has hired in the past for their projects.
- The acquisition provides Lakeland with the opportunity to provide optical fibre telecommunication services in Parry Sound. They have the know-how and infrastructure while PSH has the poles and the connections.
- This is a regulated market with high barriers to entrance. That’s the good news. The bad news is that the Province regulates prices (good for the consumer) so profits are relatively limited, but relatively secure.
On balance then it looks as though the merger is being done for many of the right reasons. When it comes to analyzing the deal terms I leave that to the board members, the Town, and their consultants. It seems reasonable to me. Hopefully the Town will apply the $3.9 million to paying down some of the higher interest debt it’s carrying. And while the annuity it was receiving from PSH will be reduced with the merger, it’s likely that net revenue would have dropped as a result of the cost of generation repair costs and a reduction in the allowable interest rate on debt. And the Town will save as much as $200K per year with the $3.9 million applied to debt reduction. It’s a net/net win.
A final consideration, I’ve had a chance to speak with two of the PSH board members, Roger Alexander and Gord Rempel about business in general. We haven’t discussed the merger for obvious reasons. I have been impressed with their business knowledge and experience. I know they have spent many hours looking at the options available to PSH and if this is what they are recommending, I believe it is the best opportunity available to the Town.
I’ll be looking at the deal figures and analyzing the merger logic for the next week or so in preparation for the open public session on December 2nd at the Bobby Orr Community Centre. At this point I think it’s a good deal for the Town. I’ll let you know what I think after the meeting next week.
A Small Part of the Deal (Parry Sound in B&W)