IBV letter to shareholders
Shareholder sees bright future for Ascendant
One of Ascendant Group’s largest shareholders is urging the company to relist its shares in Canada or the US, if it does not receive an adequate buyout offer.
Toronto-based IBV Capital has been accumulating shares in Ascendant, the parent company of electricity utility Belco, over the past four years, and now owns approximately 10 per cent of the company — a stake worth about $20 million at the current share price.
Talbot Babineau, IBV’s founder and chief executive officer, told The Royal Gazette that Ascendant remained “incredibly undervalued”, even after the rally which has seen its stock price double over the past year, from $10 to $20.
Ascendant announced in January that it was exploring strategic options including a potential sale of the company.
“An acceptable offer must meet our strong views on value, which is a premium to book value,” Mr Babineau said. “It’s also important that the other terms in a presented offer be consistent with those seen in North American transactions. We will be watching this very closely.
“If an acceptable offer isn’t presented, the company should cease the sale process and proceed with creating value for shareholders by listing its shares on a North American exchange. Butterfield Bank enjoyed tremendous success doing this and Ascendant Group would too.”
Ascendant is trading on the Bermuda Stock Exchange at a 30 per cent discount to its book value per share, which was $28.57 at the end of last year.
Comparable utilities are trading at much higher levels, Mr Babineau argued in a letter to Ascendant shareholders last month. Caribbean Utilities Company, the Cayman electric utility and another company in which IBV invests, trades at about twice its book value on the Toronto Stock Exchange.
That is one reason why IBV supports Ascendant’s aggressive share repurchases and wants to see more while prices are at current levels. Ascendant revealed last week that it spent $10.69 million buying back more than 650,000 of its own shares in 2018 at an average price of $16.43.
Critics like Sir John Swan and Michael Murphy have argued that the scale of Ascendant’s buybacks has created a false market at inflated prices. Mr Babineau sees it differently.
“This is not stock-price manipulation: this is a company acting rationally with its capital,” Mr Babineau said.
“It’s precisely what the company should be doing when its share price is so far below its book value. It’s very accretive to the value of each remaining share.”
In its 2018 annual general meeting presentation, Ascendant raised the option of listing on a North American exchange to enhance its share valuation.
IBV saw some similarities between Ascendant and Cayman’s CUC, when it first considered taking a position in the Bermudian company in 2014, Mr Babineau said.
“We made our first investment in Ascendant in 2015 and we’ve been buying shares ever since,” he said. “Now we own approximately 10 per cent of the company.
“We saw tremendous value in the company, given the evolution of the regulatory environment in creating certainty for the company. It’s almost impossible to invest capital in a utility without regulatory certainty.”
Mr Babineau launched IBV Capital in 2014. The firm evolved out of a family office, started in 2010, which managed the wealth of two successful Canadians.
IBV, which has a value investment philosophy based on its own set of core principles, is in no rush to cash out its Ascendant holding, even when it’s sitting on a paper profit.
“We take an ‘owner-operator’ approach in our investments and we take the time to get to know every one of them in great detail,” Mr Babineau said.
“We took the position in Ascendant knowing that we would be invested in it for many years and we are very comfortable with that.”
Regulation of the electricity sector had moved in the right direction, he said, particularly with oversight having been transferred from the Energy Commission to the Regulatory Authority.
“It’s transformed from a jurisdiction that had very little regulatory oversight of its electricity utility five or ten years ago to a sophisticated regulatory environment consistent with what you would see in North America — and that’s a tremendously positive step,” Mr Babineau said.
“When you think about Belco, about the construction of the North Power Station, the cost-cutting initiatives the company can achieve and the option to relist on the Toronto Stock Exchange or the New York Stock Exchange, the company has never had a brighter future.”
The new power station and investments planned for the distribution network will improve efficiency to the benefit of Bermuda, Mr Babineau argued.
“The community would like stable and possibly lower electricity prices,” he said. “The only way to achieve that is through investment in more efficient power generation and ensuring the company is run as efficiently as possible.
“When Belco is producing electricity at the cheapest possible price, that helps the economy thrive and the utility needs a thriving economy for it to be successful. It creates a positive feedback loop.”
The Regulatory Authority is finalising the Integrated Resource Plan, effectively the blueprint for Bermuda’s electricity supply for the next 20 years. During the consultation process, submissions advocating higher levels of renewable energy won strong support.
Mr Babineau did not see the pending IRP as a problem for Ascendant, as the plan will be re-evaluated and updated periodically.
“I don’t see the risks to Belco being unusually elevated at this time because of the pending IRP decision,” he said.
“It’s not an isolated decision, this will be an evolving decision, as it should be, to reflect Bermuda’s evolving set of energy circumstances.”
He added that the independence of the regulator was critical in the ongoing process and told a cautionary tale from Canada to illustrate his point.
“We in Ontario will for a long time suffer from past decisions made at the political level on things that Bermuda is now going through,” Mr Babineau said.
“We have the highest-cost electricity of any province in Canada, because of decisions made on renewable energy that have locked us into the poor position we are currently in.
“When I read through the IRP and some of the renewable submissions, I see some of the same mistakes being made and I wonder how realistic the submissions are in terms of the total cost of shifting electricity generation to renewables.”
• A copy of IBV Capital’s letter to Ascendant shareholders can be seen under the heading of “Related Media” on this webpage. IBV Capital has a website at http://ibvcapital.com/
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