Several Blitzed Energy Companies Near Takeover
November 7th, 2008
Former power-plant CEO counts on distressed mergers ... and bankruptcies
Pipeline developers, alternative energy companies and utilities are all strapped for cash, which amounts to a crisis for operations that are always in need of funds.
ThomWatch is not first with this breaking story. My former employer and partner, The Financial Times of London, by way of Sheila McNulty in Houston, has delivered investors a turbine of information in the past several weeks.
Imagine my pleasant surprise to see in these valuable paragraphs the name Karl W. Miller, a former energy CEO with whom I have shared opinions … and an Asian fusion lunch at The Slanted Door in San Francisco’s wonderful Ferry Building.
Speaking of fusion, Karl is a dead-ringer for Lee Majors, the actor who played “The $6 Million Man.” Alas, in the clanking bolts world of energy companies, in particular the small ones, Karl Miller recently got his hat handed to him. As CEO of tiny MMC Energy (NASDAQ: MMCE, Stock Forum) of New York, Miller put together a blueprint that would dot the western U.S. with small power plants that back up the utility giants during blackouts and other outages.
The company’s chairman and board of directors essentially forced Miller from the CEO’s Chair earlier this year. Miller waged what he hoped would be a bionic proxy battle against management but failed. He suffered a perforated colon due to what he calls “stress, diet and genetics,” and the 44-year-old family man was hospitalized for several weeks. Complications included an embolism, or blood clot, that traveled into one of his lungs.
The MMC affair, for me, is still a puzzle. Miller has been around the energy block, working for major companies across Europe and the U.S. I bought the shares of this independent power producer in 2007 and figured I was getting it cheap at $3 and $4 a share. After all, the company’s book value, which included cash and actual power plants in California, was probably $6 at the time. The shares have since fallen to about $1 each, giving the power management company a powerless market worth of $18 million.
I sold the shares we owned for an electrifying loss. This is no reflection on Miller, whose on-stage and personal presence are powerful, maybe too potent for some folks (. . . perhaps the MMC Energy board?). Mr. Miller reminds me in some ways of Robert M. Friedland, the Ivanhoe Mines and Ivanhoe Energy mastermind who is so Kirk Douglas focused yet Cary Grant eloquent, he can persuade live sardines to jump into a tin can at a sardine processor. Miller declines to comment these days on the MMC affair except to say he heard from shareholders whilst he was hospitalized.
Miller, recuperating but as square-jawed lucid as ever, still believes in the energy sector in the midst of this planetary blitz of energy valuations. As he awaits one more operation on his non-bionic body in the next month or two, after infections from lung complications clear up, Mr. M. has been getting some attention from private equity firms and financial reporters with his current thesis of the market.
“I have been invested heavily in energy sector for years,” Miller tells me from New York. “Let’s just say the amount is substantial.” The holdings include companies whose securities trade in Britain, Europe, Australia, the U.S., and Canada, to name a few places.
As an adviser to hedge funds and other investors, Miller, who calls himself an independent voter, sees a Democrats-loaded Congress and White House “going after” oil and gas producers to fill up the energy till. “The states just do not have any money in the till for renewable and alternative energy,” he says. “Washington has to come up with some new model for raising money and revising credits that ends the free lunch for non-economical products, in wind and in biofuels, for instance. Plus, (U.S.) Rep. Barney Frank is going to cut military budgets, and that will make the energy companies, especially alternative energy companies, incredibly volatile. ”
Miller has provided me with enough information to keep my eyes and pencil busy on a seemingly never-ending flight to Cape Town in South Africa, whenever that might be. If we were reading the new subscription report that Stockhouse and I will unveil later this month (of which see more below), I would provide much of Miller’s details and the strategy.
But since this is the free ThomWatch, I will give you the summary version, which I expect most of us still barely have time for anyway.
In a sentence or two: “I expect to see multiple bankruptcies in the alternative energy sector, which is in serious trouble financially,” Miller says. “Many of the ethanol, wind, solar and biofuel projects are upside down and destined for the bone yard.”
Miller has worthy points to make about the weakness of energy managers in emerging economies (they all will get acquired at distress-rate prices or go bust) and about the need of winners to “establish a bona-fide presence in their fields, and not just trading desks.”
* Here is what he tells me from the heart, if not the lungs: “I own the independent power producers due to coming consolidation. I own the utilities due to dividend yield, solid cash flows and defensive position,” he says. Top takeover candidates at decent multiples include Reliant Energy (NYSE: RRI, Stock Forum) and Dynegy Inc. (NYSE: DYN, Stock Forum).
* “I own the gas pipelines due to dividend, solid cash flows and defensive position.”
* I don't own any E&P stocks, too early to buy, let them slide further. I have re-loaded my portfolio in this direction and would rather sit on 5% to 6% dividend yields with upside of IPPs (independent power producers again) as equity kickers.
* “Finally, outside of AES (AMEX: AES, Stock Forum), which I own, I don't own any stocks that have significant emerging market exposure. Capital will not flow in these sectors, thus stranded assets, businesses and other issues will start to arise.”
Miller’s short list of worthy candidates include pipelines/processing, such as Southern Union (NYSE: SUG, Stock Forum), Williams Pipelines Partners (NYSE: WMZ, Stock Forum) and El Paso Energy (NYSE: EP, Stock Forum). These companies control the majority of gas pipeline, storage and processing facilities in much of North America, he says.
In the area of merchant power, Miller has Calpine, NRG (NYSE: NRG, Stock Forum) and Mirant (NYSE: MIR, Stock Forum) on his screen. “These are top acquisition candidates in the unregulated sector, likely to be bought at acceptable multiples.” (We here at The House of Calandra own none of these. Nor do we own Ivanhoe Mines or Ivanhoe Energy.)
That’s it for now.
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