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Don't Expect Windfall From TerraForm Power Sale

Brookfield Asset Management and Appaloosa Management are making another bid to buy SunEdison's controlling stake of TerraForm Power Inc (NASDAQ: TERP), but shareholders looking for a windfall from the acquisition may be disappointed. Bloomberg is reporting that the offer is for just $13 per share, below where shares closed on Friday. And it's not likely the hedge funds will be inclined to pay up for assets currently bogged down by a bankrupt parent.

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Creditors won't jump at the TerraForm Power offer

The offer Brookfield and Appaloosa are making valued TerraForm Power at about $1.8 billion and is for the entire company. But Brookfield has said it will make a cash offer for a 50% to 60% stake as well. Under both scenarios, the funds want control of the yieldcos, cutting SunEdison out of their operations.

Brookfield is also reportedly preparing to make an offer for TerraForm Global Inc (NASDAQ: GLBL), the troubled yieldco from SunEdison with exposure to international projects. It's not yet clear what that offer will entail, but we can assume SunEdison would be cut out from operations again. And with some of TerraForm Global's contracts going into default if there's a change of control, the process could get messy.

The problem in both cases is that a buyout of the yieldcos may not be in the best interest of creditors. They may see more value from just reorganizing around the two yieldcos and slowly collecting dividends from the project cash flows. That's really what Appaloosa and Brookfield are bidding against.

The argument buyers will make against SunEdison

Stuck in the middle of this battle are public shareholders in TerraForm Power and TerraForm Global. The reality for shareholders is that they need Brookfield and Appaloosa more than the other way around. To get free of SunEdison, the developer has to sell its stake in the yieldco, which may lead to the market trusting the company's management once again.

But SunEdison will likely have to sell its shares at a discount to attract any buyers, which won't please bankruptcy creditors. In the meantime, Brookfield and Appaloosa can sit on the sidelines and wait for SunEdison's shares to come to them at a discount, rather than paying any sort of premium.

Brookfield is trying to argue that the value of the TerraForm assets will decline the longer SunEdison and its creditors wait to sell, putting pressure on creditors. But it's unclear if that argument will work.

Is there upside in the TerraForms?

Investors holding TerraForm Power and TerraForm Global may be betting on a buyout as a way to extract value from shares. But the $13 per share offer for TerraForm Power indicates that no interested buyer is going to pay a premium for these yieldco assets. They're trying to get shares on the cheap. And with few options to extract value, the buyout may still be the best option for public shareholders.

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