Teranet Buyout

November 6th, 2008 by Potato

If you’re interested at all in the Teranet (TF.UN) story, then you’ve probably already heard that Borealis/OMERS has decreased its hostile takeover bid from $11/unit to $10.25, to reflect the downturn in the markets. That has… displeased me. These guys seem to be screwing around just because they can, and it’s not going to end well for anyone. The downturn in the markets had made their original hostile offer gain the blessing of management, but then yanking the rug out from under them is not going to lead to a smooth takeover. It’s not like they would have been getting a raw deal at $11: they’d get a good 7% tax-free yield (an artifact of the Con income trust tax grab is that it doesn’t affect pension funds). Personally, I think the fund is a decent buy at $10.25, and I’m not just saying that because my cost base happens to be $10. It’s a cash generating machine with a government-sanctioned monopoly for another 5 years. It yields 8.5% now, or 7.4% at the original $11 bid. Their payout ratio is getting down below 70% — the magic number where they can maintain distributions after 2011; for the pension fund, they could theoretically extract the entire distributable cash amount, yielding 10% on the original $11 bid, 11% on the revised bid.

I know things are in the crapper lately, but I just can’t wrap my head around why OMERS would make such an opportunistic, dishonourable course change. Unless a big holder out there is in trouble (and there might be some who bought in after the hostile takeover bid was announced and paid $11 in the hopes of a bidding war), I can’t see them getting the support they need to bring this deal to a close. I know that I would rather just hold on and continue to collect my 8% for another decade than give it up for $10.25, even if the current market conditions mean that there are lots of safe trusts out there with yields above 10% I could move to. If the buyout fails, then Teranet will probably drop to join them, and then I’ll just buy more. Heck, if we figure that the fair market value of Teranet is about $8 right now (so it yields about the same as IPL.UN is right now), and that OMERs should pay a premium of about 30% to take them over, if only from the tax treatment alone, then we can see that the $10.25 bid is lowballing it…

Ah, well, reputations are cheap these days, whereas credit is not, so I guess I can’t blame OMERS.

One Response to “Teranet Buyout”

  1. Potato Says:

    Well, the buyout’s going through. Word is a lot of mutual funds wanted cash these days, even if it was a lot lower than such a buyout (a monopoly!) would have been last year, or a year from now.