Sell Clean Power

I’ve never held Clean Power Income Fund (CLE.UN, CEANF) in the Canadian Edge Portfolios. For one thing, the distribution rate has consistently exceeded cash flow over the past few years. And though the trust has disposed of its cash-draining investment in gas recovery systems in the US—and successfully opened a major wind-power facility—that continues to be the case.

In this context, Clean’s upcoming merger with Macquarie Power & Infrastructure Income Fund (MPT.UN, MCQPF) is extremely positive for unitholders. The takeout price—either including 19 cents Canadian in “contingent value receipts” or no—is generous.

That offsets the deal’s built-in distribution cut from the Clean assets, which itself should guarantee Macquarie makes a pretty penny from the purchase going forward. Coupled with other likely acquisitions, being part of the Macquarie trust is extremely promising for Clean’s current holders who swap their shares.

Unfortunately, a complication has developed for US investors. Namely, we can’t take Macquarie’s offer by swapping shares. Instead, the units held by US investors will be aggregated and sold on the Toronto Stock Exchange, Clean’s home market. US holders will then get their share of the proceeds post-sale in cash.

In theory, those who hold through the merger should still garner the same return dictated by the terms of the merger. On the other hand, that ultimate value will depend heavily on the value of Macquarie shares at the sale date.

I’d be willing to take the risk they could slip a bit were we able to hold Macquarie shares after the merger. The fact that our options are now being limited leads me to a different conclusion, i.e., that it makes sense to go ahead and sell now.

For one thing, you’ll avoid the hassle of the conversion process, which may or may not go smoothly depending on what brokerage you’re using. For another, you’ll lock in a price now for your Clean shares that should be only slightly below the current takeover value of about USD6 per share—which assumes the best for the contingent value units.

At that point, you can plough the funds into one of the  Conservative Portfolio trusts, including Macquarie Power & Infrastructure, which remains a buy up to USD12.

Note Tuesday’s Maple Leaf Memo has updates on a wide range of trusts covered in How They Rate, including Versacold Income Fund (ICE.UN, VCLDF), a buy recommendation from the May issue that’s received a takeover offer. To sign up for Maple Leaf Memo—which is complimentary with your Canadian Edge subscription, including updates—click here.