Octopus Renewables Infrastructure Trust (ORIT) and Aquila European Renewables (AERI) have made announcements in relation to proposals for a merger between the two companies that could create one of the largest LSE listed diversified renewable energy investment trusts. However, in its response, AERI, says that the proposals from ORIT were unsolicited and that “together with its advisers, it continues to explore a number of different initiatives to address the issues facing the sector and to secure recognition in the Company’s share price of the real underlying value of the Company’s portfolio”. AERI’s board goes on to say that it is considering broader options for AERI’s future, including the possible combination with another listed investment company and that it intends to consider the ORIT proposed combination as part of this wider process early in the new year. [QD comment: AERI is a good size and has a decent track record of performance, so it should be able to expand again once markets settle. Given their different focuses, we’re yet to be convinced that merging these different strategies into one fund makes sense at the current time. We think that AERI’s board is right to consider a broader range of options if it thinks that one of these could ultimately lead to greater value for its shareholders than the ORIT offer that is currently on the table. AERI’s board will also need to consider the interests of all of its shareholders and not just those that ORIT has approached].
ORIT’s Board says that it believes there is a strong rationale for shareholders of both companies, and that the proposed combination could deliver the following benefits:
- A further diversified portfolio of European renewable energy assets, with a combined portfolio net asset value (NAV) of almost £1 billion and gross asset value (GAV) of c.£1.6bn;
- Complementary portfolios offering increased geographic diversification, with almost no overlap between the two;
- Greater technological diversification, with the combined portfolio including onshore wind, offshore wind, solar PV, hydro, green hydrogen, battery and developers (including floating offshore wind);
- Substantial portfolio of operating assets combined with exposure to construction and development expected to support NAV growth;
- Opportunities to extend ORIT’s current capital recycling programme;
- Exposure to ORIT’s growing and attractive dividend, with a targeted increase for FY 2023 of 10.5 per cent. in-line with inflation (CPI) and a progressive dividend policy;
- Creation of one of the largest, LSE-listed diversified renewable energy investment trusts, a FTSE 250 constituent with a combined market capitalisation of c.£745m and expected to offer greater secondary market liquidity;
- Scope to access global equity and debt capital markets more efficiently;
- Portfolio management carried out by ORIT’s investment manager, Octopus Energy Generation, a specialist renewable energy fund management team of over 120 professionals; and
- Access to a significant pipeline of projects sourced by Octopus Energy Generation.
ORIT has been persistent in its approaches
ORIT’s board says that it has sought on several occasions during 2023 to engage with the Board of AERI, with a view to effecting a combination of ORIT and AERI. Approaches were initially made in March and May 2023 ahead of AERI’s 2023 annual general meeting and continuation vote, and most recently in November 2023. ORIT’s board says that, over that period, there was no material engagement from AERI on the proposed combination, having delayed a substantive response to ORIT’s November approach into 2024. ORIT’s board says that, over the past few days, ORIT has consulted with a number of AERI shareholders, receiving support for the Boards of ORIT and AERI to enter substantive discussions regarding the proposed combination. Since the shareholder consultation, ORIT has again contacted the Board of AERI to seek to progress discussions regarding the proposed combination and looks forward to further expected interaction over the coming weeks.
Further details regarding the proposed combination
As at 21 December 2023, ORIT’s shares traded at a 16.3 per cent. discount to its last reported NAV and AERI’s shares traded at a 29.3 per cent. discount to its last reported NAV. The Board of ORIT anticipates that the terms of the Proposed Combination would be set on a FAV for FAV basis, to be agreed between ORIT and AERI.
If heads of terms are agreed with AERI, implementation of the Proposed Combination through the Section 110 Scheme would require approval by each company’s shareholders, resulting in the voluntary liquidation of AERI and the rollover of its assets into ORIT in exchange for the issue of new shares of ORIT to holders of AERI shares. Octopus Energy Generation will act as the investment manager to the enlarged company.
In accordance with customary practice for schemes of reconstruction pursuant to section 110 of the Insolvency Act 1986 involving investment companies, the City Code on Takeovers and Mergers is not expected to apply to the Proposed Combination via the Section 110 Scheme.
ORIT’s board emphasises that there can be no certainty that engagement will progress, that heads of terms will be agreed or whether the Proposed Combination will take place at all. Should heads of terms for the Proposed Combination be agreed, further details and a proposed timetable of the Section 110 Scheme will be announced. Agreement of heads of terms for the Proposed Combination will be subject, inter alia, to the Board of ORIT and Octopus Energy Generation completing further due diligence on AERI and its portfolio.