Octopus Renewables Infrastructure (ORIT ) is determined to bring its net asset value to £1bn through a merger with Aquila European Renewable (AERI ) but the board of the latter appears to need some convincing.

ORIT, which has a £604m portfolio, said there is ‘compelling logic’ to create one of the largest diversified renewable energy trusts through a combination of the two trusts, which will have a gross asset value of £1.6bn and a net asset value (NAV) of £1bn.

The ORIT board said it had approached the AERI board multiple times throughout the year, including in March and May ahead of Aquila’s general meeting and continuation vote, with the latest attempt in November.

‘Over that period, there was no material engagement from AERI on the proposed combination, having delayed a substantive response to ORIT’s November approach into 2024,’ the board of Octopus said in a stock exchange statement on Friday.

However, the Octopus board, chaired by Philip Austin, was not deterred and over the past few days has consulted with AERI shareholders and received support for its proposal.

‘Since the shareholder consultation, ORIT has again contacted the board of AERI to seek to progress discussions regarding the proposed combination and looks forward to further expected interaction over the coming weeks,’ Octopus Renewables said.

Shareholders in AERI include BlackRock with 13.5%, CCLA Investment Management with 5.4% and Baillie Gifford which has 5% in both it and ORIT.

Octopus’s other largest shareholders are Sarasin & Partners, Rathbones, RBC Brewin Dolphin and Schroders, with 9.9%, 7.4%, 5.2% and 5% respectively.

Shares in AERI soared 5.5% on the news, while Octopus shares saw a modest rise of 0.6%. 

Aquila’s board noted the announcement and said it ‘continues to explore a number of different initiatives to address the issues facing the sector and to secure recognition in the company’s share price of the real underlying value of the company’s portfolio’.

The details

The Octopus board anticipate the deal would see ORIT, whose shares are trading at a 16.3% discount, and AERI, whose shares are at a 29.3% discount, combine on a formula asset value to formula asset value basis.

While operating in the same asset class the two portfolios are very different, with no overlap. The combined assets will be invested across onshore wind, offshore wind, solar PV, hydro, green hydrogen, battery and developers, including floating offshore wind.

Jefferies analyst Fiona Huang said the deal looks like a ‘sensible transaction’ pointing out that AERI has another continuation vote due in September.

‘One potential impediment we can see, however, is that AERI holds minority stakes in some projects (The Rock, Tesla and Sagres hydropower), with other Aquila funds holding the majority, meaning ORIT would not have full control of the acquired portfolio,’ she added.

However, not all analysts were convinced. Matthew Read from QuotedData said the company ‘is a good size and has a decent track record of performance, so it should be able to expand again once markets settle’.

‘Given their different focuses, we’re yet to be convinced that merging these different strategies into one fund makes sense at the current time,’ he continued. ‘We think that AERI’s board is right to consider a broader range of options if it thinks that one of these could ultimately lead to greater value for its shareholders than the ORIT offer that is currently on the table. AERI’s board will also need to consider the interests of all of its shareholders and not just those that ORIT has approached.’

Over three years, ORIT, which launched in December 2019, has delivered underlying returns of 29.2%, while Aquila has seen its net asset value rise 17.6%, both below the renewable infrastructure peer group average of 45%. Over that time the share price of ORIT is down 7.2%, while AERI’s is down 20.3%.