What we are looking for
A U.S. renewable energy company that could be an acquisition target.
The Financial Times recently reported that “public markets are undervaluing clean energy companies,” which would suggest an opportunity for value-oriented investors. In order to profit from spotting an undervalued company, a catalyst needs to occur to rally the shares to their inherent value. One of the most immediate catalysts is a buyout or acquisition, which usually occur at a significant premium to the prevailing public market share price.
So institutional investors are swooping in, “lured by what they see as bargains in the renewable energy sector.” Brookfield Corp. is taking over Neoen SA, a French renewable power producer; KKR & Co. Inc., a private equity giant, is buying its German peer, Encavis AG.
There are also recent examples of deep-pocketed energy companies making “strategic” acquisitions, with Masdar, the Emirati state-owned renewable energy company, buying Greek wind utility Terna Energy. Years of high oil prices combined with capital discipline on the part of oil companies means many are sitting on a war chest of cash that could be deployed to more acquisitions, as they seek to diversify and decarbonize their product mix and respond to growing demand for renewable energy.
To identify the next potential targets, we will use the London Stock Exchange Group’s (LSEG) StarMine Mergers & Acquisitions Target Model, which provides relative rankings of public companies that are likely to be acquired within the next 12 months.
It does this by applying a large language model to millions of news articles, as well as analyzing fundamental factors such as recent takeover offers, valuation, credit quality, dividends, size and recent proxy fights. The model also takes into account that economic sectors can experience waves of higher M&A activity that are likely to persist. And the energy sector is flagged as one that has seen a significant increase in takeover action that is likely to be sustained over (at least) the next year.
Over the past 22 years, companies scoring in the top 10 per cent (that is, scoring 90-100) are nine times as likely to be acquired in the next year than those scoring in the bottom 10 per cent.
More about London Stock Exchange Group
LSEG is one of the world’s leading providers of financial markets infrastructure and delivers financial data, analytics, news and index products to more than 40,000 customers in 190 countries. Since 1698, we have been helping customers seize opportunities and create value.
The screen
We start with a universe of U.S.-listed companies in the Thomson Reuters Business Classification (TRBC) Renewable Energy Industry Group. Then, to narrow the list to renewable energy “pure plays” (rather than those that also have significant traditional energy segments), we screen for those whose revenue is greater than 95 per cent Green Revenue (a proprietary LSEG measure). Next, we identify the most likely takeover targets by screening for those scored 99 or 100 by the M&A target model.
What we found
The most predictive fundamental element of the model is prior deals. If a company has been a target in the past, it is more than twice as likely to be a target in the future, and more recent deals have an even stronger impact.
Two of the three companies scoring 100 have been involved in deals in the past few years: SunPower Corp., a solar technology and energy services provider, with French oil giant Total Energies and Global Infrastructure Partners; and TPI Composites, a manufacturer of blades for the wind energy market, with OakTree Capital Management.
Two other predictive elements of the model are size and valuation ratios (and in particular price to book). The third company scoring 100 – Gevo Inc., a renewable fuels maker – has the smallest market cap and the lowest price to book ratio, both indications that it is more likely to be an acquisition target.
Hugh Smith, CFA, MBA, is director of sustainable finance and investing at London Stock Exchange Group.