Terraform Power (TERP) shares plummeted to $11.50 today after Brookfield Asset Management (BAM) announced that the “stock” merger election option was oversubscribed. This was not at all unexpected (I predicted as much last week), nor does the stock decline indicate any uncertainty about Terraform’s future under Brookfield’s control.
The reason the stock fell was because the only TERP shares that can currently trade are shares for which the owners failed to make an election (choosing cash or stock) in the acquisition. Because the “stock” election is oversubscribed, anyone buying TERP shares on the market today will not have a stake in the company. Rather, they will receive a $1.94 special dividend, plus $9.52 in cash for their shares. Hence, the shares trading today are worth $9.52 plus $1.94, or $11.46.
The only surprise is that TERP did not fall below $11.50 immediately after the election deadline on October 12th.
Profit Opportunity
As I write, TERP is still trading at $11.55, so there is some small opportunity to profit by selling the stock short. That is, if the few shares out there were available to borrow. Since they are not, shorting is not an option, so this is not a real opportunity.
There does seem to be a large profit opportunity in the option market, however. Call options seem to be priced as if the TERP stock price actually reflects its prospects going forward. But, as I argued above, $11.46 is only the value of the TERP shares that did not make the stock merger election.
People who buy TERP calls, on the other hand, will have the right to buy future shares of TERP at the call price after the merger goes through, when there will be half as many TERP shares available, and the Yieldco will have a new, well respected sponsor: Brookfield Asset Management.
I bought a large number of the longest dated Terraform Power $15 calls this morning for $0.05 each. Short puts and long dated $12 calls are also very interesting. Option sellers seem to be mispricing their calls based on a temporary aberration in the market for TERP stock.
