Capstone Stock Gets a Boost From a Faraway Takeover Battle

The stock of Chatsworth micro-turbine builder Capstone Turbine Corp. got a boost Monday for its minor role in a takeover battle being waged half a world away.

Capstone has become the sweetener in a tug of war that pits two prominent oil companies against an investment group for control of New Zealand’s biggest oil and gas company, which owns a nearly 10% stake in Capstone.

The outcome could help erase a cloud that has tarnished Capstone’s share price in recent months, analysts said. Capstone’s stock jumped 12% on Monday, or $3.06, to close at $27.75 on Nasdaq after a “strong buy” recommendation from Credit Suisse First Boston analyst Marko Pencak.

In New Zealand, oil companies Royal Dutch Shell Group and Apache Corp. of Houston have teamed up to battle for control of Fletcher Challenge Energy, an Auckland-based oil and gas explorer that also makes newsprint and other paper products.

Fletcher’s stake in Capstone is worth about $195 million. The company was an early investor in Capstone, a maker of fuel-efficient, refrigerator-size electricity generators that went public last year, and most of the value in its stake stems from a tremendous increase on its initial investment.

Shell and Apache are offering $3.55 a share, or about $1.7 billion, plus a share in a new company that would comprise Fletcher’s non-energy assets. Additionally, Fletcher shareholders would receive one share of Capstone for every 70 shares of Fletcher owned.

But along has come Peak Petroleum Co., controlled by a group of Canadian and New Zealand investors, which has made a similar bid for Fletcher, offering $3.85 per share, or slightly more than $1.7 billion.

However, analysts in New Zealand expect Fletcher shareholders to approve the Shell and Apache offer today because they are more confident of the financing.

With nearly 10% of Capstone in play, Pencak raised his assessment of Capstone, saying its the price of its shares could more than double to $57.50 over the next year.

A Fletcher merger would provide relief for Wall Street, which has held down Capstone’s share price out of fear that Fletcher might dump more than 7 million Capstone shares into the market if it liquidated.

“The market priced down Capstone shares because of that perception, so this could only be a boost from now on,” said Masroor Siddiqui, an analyst with Goldman Sachs in New York.

Fletcher shareholders receiving the Shell-Apache distribution of Capstone stock would not be able to sell their holdings for at least six months because of covenants in the merger agreement.

Meanwhile, Capstone continues to sign contracts to sell its on-site generators, which have gained in popularity as an alternate power source during California’s electricity crisis, Siddiqui said.

Capstone sold only 790 generators last year but is quickly ramping up production and distribution. Last month, it formed a subsidiary to concentrate on the California market, where businesses are purchasing its generators that range in price from $30,000 to $50,000 and guarantee a reliable power source during outages.

Siddiqui estimates that Capstone will sell more than 8,000 turbines in 2002, a volume that will allow it to make about $20 million. He projects a loss of about $12 million this year.

Such a sales pace would place Capstone on a steep growth curve.

Jeff Watts, Capstone’s chief financial officer, said the company will sell 2,000 to 4,000 units this year. Though the company hopes to be profitable by 2002, he wasn’t making any projections.

One wrinkle is that in the U.S. Capstone’s low-emissions turbines typically run off natural gas. But prices of natural gas have risen sharply in recent years, which cuts into the economics of the generators.

Natural gas for April delivery rose 6.6 cents, or 1.3%, to $5.336 per million British thermal units Monday on the New York Mercantile Exchange. Prices are up 7.8% from a four-month low Feb. 26 and are almost double the year-ago level.

Capstone maintains that customers using natural gas will pay about 16 cents per kilowatt-hour of electrical generation over five years. That includes the cost of the generator. That compares with 3.5 cents a kilowatt-hour when the generators use waste gas such as methane.

Because natural gas is so widely used in generating electricity, Siddiqui said, similar problems will be encountered with other sources of power. Perhaps a greater issue, he said, is whether there will be the pipelines and supply routes to get the gas to the generators.

“It looks like there will be a fuel crunch at some point,” Siddiqui said.

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Reuters was used in compiling this report.

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Power Play

Capstone Turbine got a boost Monday from a positive analyst assessment that sees its stock doubling in the next year.

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Weekly closes and latest on Nasdaq

Monday close: $22.75, up $3.06