Page B1 of today’s Wall Street Journal discussed the possibility of Calpine putting itself up for sale. The news broke yesterday and the stock rose 18%. You can see the article here.
Calpine, and all of the other IPPs, have definitely been out of favor with the stock market. The WSJ article showed a chart with stock performance in 2017, but if you go back to the beginning of 2014 you can see just how far these names have fallen.
And as the stock price has declined, the number of short sellers has continued to increase. These short sellers may be adding extra upward pressure to the stock price as they buyback their shares before a high deal price is announced.
All this negativity has taken place while CPN has been generating cash. Management expects the cash flow generation to continue, and they will be using $2.7B of the cash flow to reduce debt as shown in this chart from their Q1 presentation.
Source: Q1 Presentation
At the time of the presentation, Calpine’s stock was trading at about $10/share. If they reduce debt by 75% of the market cap, that would imply that the remaining enterprise value of the company flows over to equity, which could raise the stock price by $7.50/share. Reducing debt also should make the company less risky, which might give the opportunity for higher valuation multiples. Of course, there are risks that future cash flows won’t come in as high as today’s levels, but with Calpine’s relatively young generating fleet and their focus on gas generation, they could have a better chance of maintaining their cash flows than some of their competitors.
This potential upside from the debt buydown means that anyone trying to buy the entire company is going to have to pay a high price to take it away from the current shareholders.