A key reason for doing so was down to the fact that the shares were trading on a hefty discount to the company's book value of $109m (£75m) at the end of 2015, and a chunk of those assets were likely to be sold this year. They still are. Indeed, the vast majority of the value in the company's $117m investment portfolio is tied up in one holding, a 2.3 per cent shareholding in Invenergy Wind LLC, North America's largest independently owned wind power generation company. Leaf Clean Energy originally invested $40m in Invenergy convertible loan notes in 2008 and 2009, and subsequently converted these into equity last year. The stake had a value of $101m at the end of December since when the company has received a capital return of $3.9m.
Invenergy has since exercised its right to buy the shares owned by Leaf Clean Energy, and Leaf Clean Energy has exercised its right to sell the units to Invenergy. Both companies are entitled to initiate these put/call processes under the terms of the aforementioned Operating Agreement governing the original investment. In light of these moves, third-party appraisers have been retained and in an announcement to the London Stock Exchange on Tuesday 3 May the company confirmed that the two appraisers have placed a value of $76m and $36.4m, respectively, on the Invenergy stake. Because of the wide disparity a third appraiser will be jointly appointed and the average of the three valuations will be used.
For illustrative purposes, if the average valuation is used then Leaf Energy's net asset value is 43p a share, albeit that is significantly less than 63p at the end of December 2015. However, it's worth flagging up that the valuers have to take into consideration a number of factors when making their assessment and a major one is a legal action instigated against Invenergy by Leaf Clean Energy in the Delaware Court of Chancery in Delaware, US. The complaint concerns the sale of 930 megawatts of wind power capacity for $2bn (£1.4bn) to New York Stock Exchange-listed TerraForm Power (US:TERM) at the end of last year.
That disposal was significant because Leaf Clean Energy's board believed at the time, and still does for that matter, that the company's equity investment in Invenergy is governed by the Operating Agreement it entered into when it acquired the convertible loan notes and that Invenergy was required to either obtain its consent to the TerraForm Sale prior to its consummation or, absent such consent, make a payment to Leaf Clean Energy upon the closing of the sale. The amount of such payment is determined by a formula in the Operating Agreement which Leaf Clean Energy's board has calculated to be $126m, or £88m. That's almost double Leaf Clean Energy's own market capitalisation of £45m.
Clearly, third-party appraisers simply can't ignore the possibility that Invenergy could lose the court case against Leaf Clean Energy, and this will impact (negatively) the value they put on Invenergy's equity. In other words, the put/call process and the $126m complaint are not mutually exclusive events.
The bottom line is that once the put/call process completes, and Leaf Clean Energy in effect divests of most of its assets, then any upside from the $126m complaint is in effect in the price for free given that the shares are trading well below book value. Moreover, the vast majority of net asset value will be in cash which the company intends to return to shareholders. To put this into perspective, Leaf Clean Energy's net funds are now north of $8m, or 5p a share, and that's before the sale of the Invernergy stake which at the average of the two aforementioned valuations would be worth around 32p a share.
In the circumstances, I would recommend that you hold onto Leaf Clean Energy's shares if you followed my earlier advice and await news of the third valuation of the Invernegy stake, and an update on the complaint in the Delaware Court. Hold.
