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Brookfield power spinoff makes sense

awillis@globeandmail.com

There could be a green machine coming at Brookfield Asset Management, as the company weighs spinning out a portion of its $7.4-billion portfolio of power assets.

After successfully giving birth to infrastructure and timber funds, Brookfield revealed last week that it is considering creating a fund that would hold renewable power assets such as hydroelectric properties and wind farms.

Such an offering would suit the times, to put it mildly. For potential investors, hot buttons on this fund include two dozen projects in Brazil, an up-and-coming economy where Brookfield has proven expertise.

Kudos to National Bank Financial analyst Michael Smith for pumping out a report on Brookfield's earnings that noted on page 13 of the supplemental financial notes, "the following new phrase was added by management: 'We continue to consider various alternatives to establish an externally managed entity through which we can share the ownership of these assets [the power assets] with others on a fee-bearing basis.' "

A Brookfield power fund makes sense on every level, starting with the overlying strategy of the parent company. Brookfield's long-term goal is to become a global asset manager, investing its own capital alongside partners such as pension funds and sovereign wealth funds.

Brookfield's template, as Mr. Smith pointed out, is to build a company that has an 80/20 split between outside capital and its own invested cash, one that earns a reliable 1.5-per-cent annual fee on real estate, timber, infrastructure, merchant banking and, of course, power assets.

The power fund could be launched within 12 months, Mr. Smith projected. That would give Brookfield additional financial firepower as it prepares to break ground on 16 Brazilian power projects with 578 megawatts of capacity, and finishes construction of six dams with 137 megawatts of capacity, projects that carry a $350-million price tag.

Results from the power assets were the highpoint of Brookfield's financial report on Friday, with electricity generation running 5 per cent above historic averages, and consumers paying 11 per cent more for this juice than they did in 2007.

Brookfield managers, most of whom have accounting backgrounds, flagged the fact that the dry language of auditors hides the potential of the power assets. The company said in Friday's release: "We believe the intrinsic value of our power assets is much higher than the book value because the assets have either been acquired at attractive prices or held for many years and therefore depreciated for accounting purposes which, in our view, is inconsistent with the nature of hydroelectric generating assets."

From an investor's point of view, Mr. Smith said launching a power fund could be a "major catalyst" for Brookfield stock. He sees such a fund drawing attention to the underlying value of the company's holdings, and marking a "significant milestone" in Brookfield's evolution as the third-party manager.

No. 1 hires a heavyweight

The No. 1 structured-products team on the Street has a new leader, as CIBC World Markets announced yesterday that it hired Mike Shuh from National Bank Financial.

CIBC World Markets picked up a new managing director for a group that creates securities for retail investors, such as funds of hedge funds or portfolios of dividend-paying stocks for income-seeking investors. Mr. Shuh has spent 10 years in this field and was running the retailed structured-products team at National Bank Financial. He replaces Ron Mitchell, a veteran who left CIBC World Markets earlier this year.

Investor appetite for structured products has fallen off in recent months, in part because of poor performance from some ill-advised creations out of corporate finance laboratories.

However, there is an interest in the right securities, as CIBC World Markets showed by moving $400-million of structured products in the first six months of the year. Thomson Reuters statistics show CIBC World Markets is the dealer at the top of the league tables, with 20 underwritings and 25-per-cent market share. National Bank Financial ranked No. 5 on this list, with seven deals worth $116-million.

CIBC World Markets claimed first place in structure-product league tables for the first half of 2007 by selling $1.3-billion in 31 underwritings, according to Thomson Reuters.

*****

By the numbers

$95-billion

Brookfield's assets.

$35-billion

Total owned by outside investors.

$113-million

Third-party asset management fees earned in most recent quarter.

$95-million

Third-party asset management fees earned in the same quarter of 2007.

*****

Brookfield Asset Manage

SHARE PRICE, DAILY CLOSE, (BAM.A-TSX)

Yesterday's close

$34.05, up 23¢

SHARE: THOMSON DATASTREAM

© 2007 The Globe and Mail. All rights reserved.

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