I continue to see more headlines that somewhat indicate the turning sentiment in nuclear. By virtue of blisteringly high energy prices across the board, and strong climate change forces, nuclear is an obvious solution or at the very least, a bridge.
Germany, the green energy leader (and thus biggest victim of the current state of affairs because green energy isn’t yet mature in capacity to provide reliable base-load power), is turning its coal plants back on:
Democratic constituents are suddenly coming out of the woodwork to tacitly support nuclear:
A nuclear power startup just raised a monster round of funding:
All is to say I continue to smile as one of our holdings, a publicly traded private equity fund (Brookfield Business Partners), owns one of the biggest nuclear power services companies globally and is taking it to market this year. I wrote a bit more about BBU’s nuclear progress prior. I presume the process is moving forward in the background despite major market volatility, as the company is expanding market share systematically due to the absence of Russia in the market:
Time will tell what this business will go for but I’m excited about its prospects to potential buyers.
Disclosure: We own shares of BBU, this is not investment advice. Do your own work.
Brookfield has been a late bloomer in traditional opportunistic private equity. That said, it has been scaling fast with its current flagship in market targeting (off the top of my head) up to $15B.
It started around the fringes of its core investing businesses, which include real estate and infrastructure. Broadly speaking, the portfolio is heavily industrials focused and only recently established a technology team (with a focus on lower growth, high cash flow tech or tech services with infrastructure-like characteristics).
Brookfield floats a publicly traded sleeve of its private equity fund (as it has done for most other funds) on the NYSE. Here’s a view of NAV per Brookfield (note – the stock effectively did a 3:2 split after this presentation):
2021 BBU Investor Day Presentation
In the above, Brookfield believes the $75+ / unit is real based on the operational line of sight to margin improvements and organic growth. The CFO commented at investor day:
Similar to prior years, this represents our view on spot value or spot NAV and more of a liquidation value as opposed to a long-term franchise value.
Cyrus discussed the potential of doubling the size of BBU over the next 5 years. And this is very readily achievable given that we’re more than halfway there with our current portfolio. Just to be clear, the $75 upside per unit does not include any expansion multiples. The primary drivers are continued execution of our operational improvement and enhancement of EBITDA at Westinghouse and Clarios. It also doesn’t include any of the exciting technology investments orother new acquisitions we may make over the next few years or monetizations and recycling activity.
2021 BBU Investor Day Transcript
To that end, what new acquisitions have been in the pipeline since Sept-21? Actually, a lot.
What about monetizations? BBU is moving its biggest and most successful holding, Westinghouse to the auction block. Westinghouse has been an absolute home run before the Ukraine crisis, but the trajectory of the business has fundamentally changed after Eastern European nuclear facilities have been forced to absolve themselves from Russian uranium supply and nuclear services. BBU is also moving towards a major monetization event of Clarios (likely an IPO), its other massive equity position, within the next 12 months.
Brookfield’s publicly traded PE sleeve (BBU) trades around $23 / unit today (~$27 for the C-corp share, which has no K-1. Quite the premium for no tax complexity), which is equivalent to ~$35 on the Investor Day share count. So roughly a 35% discount to liquidation value today excluding the progress on the acquisitions side since investor day.
Holders of the stock (*units) may see some harvest of value as promises of monetizations mentioned above come to fruition and the bridge financing provided by its benevolent parent ($1.5B of 6% prefs) can be repaid. But make no mistake, a publicly traded partnership with a hedge fund-like fee burden won’t ever trade well in US markets – investors hate the complexity. Perhaps the more obvious long term catalyst to close the gap to NAV is Brookfield Asset Management buying out public holders at a discount to NAV, harvesting the arbitrage for itself, and closing the door on this option for retail as it did for its real estate version of this, Brookfield Property Partners.
Disclosure: We own units of BBU, this is not investment advice. Do your own work.
In the past five years, there has been a wave of publicly traded partnership (PTP) conversions to C-corps. The two core reasons being it broadens the investor universe as indices often can’t purchase PTPs and PTPs are administrative / tax nightmares.
Brookfield Business Partners (BBU) just spun off an identical C-corp (BBUC) that trades parallel to BBU. Within no time, the C-corp is at a major premium to the PTP:
This isn’t the first time Brookfield has done this as both Brookfield Infrastructure and Brookfield Renewable both executed this spin-off as well, and have seen similar results as far as the C-corp trading at a premium.
It doesn’t change the course of daily business, but does offer a more richly priced currency to utilize in raising capital or making acquisitions. Brookfield’s has not been shy to raise capital by selling down Brookfield Renewables’ C-corp shares and utilized Brookfield Infrastructure’s C-corp shares as the currency for a material portion of its InterPipeline acquisition.
While the premium comes and goes (see below for Brookfield Infrastructure), one can hope that in due time it expands the degrees of freedom that the entity has:
Disclosure: We own shares of BBU / BBUC. This is not investment advice, do your own work.
People like to use the above phrase to describe investment opportunities that offer a solid core business and potential upside options associated with the business.
In this case, I’m thinking about Westinghouse, a portfolio company of Brookfield Business Partners (BBU) that I’ve owned for a while and recently increased to be a full sized core position.
Brookfield’s PE business bought this business out of bankruptcy as a sort of “value” investment – in the sense that it was a low statistical going in multiple. The team was able to execute on their underwritten cost reductions and has been tucking in a number of smaller acquisitions to grow its service and coverage.
The investment has been a smashing success, as the business is throwing off 30% cash on cash at this point. To that end Brookfield bought the steak cheaply.
Westinghouse is a nuclear services business with ~50% market share. Nuclear power has historically been a shrinking market based on the perception of nuclear disasters. What is interesting about the business is in light of a few things, not limited to but including energy crises in the EU due to renewables not successfully filling the gap during cold spells, increasing (and persistently volatile) hydrocarbon prices, and decreasing geopolitical stability, nuclear is having somewhat of revival in perception.
If the turn in perception results in true change in action, specifically in deploying more nuclear vs. shrinking the supply, the single digit organic growth of Westinghouse may change dramatically. Furthermore the multiple of the business would dramatically change. The proverbial sizzle.
Edit: Bloomberg had a timely article on the state of EU nuclear in today’s news.
