SUNE and VSLR: What’s in It for the Shareholders?

They say two wrongs don’t make a right, but does combining two unprofitable solar energy companies make one profitable outfit? Shareholders of Vivint Solar (VSLR) and SunEdison (SUNE) are about to find out, as the latter announced on Monday it would be acquiring the former in an effort to beef up its presence in the residential solar power market.

SUNE, VSLR, Vivint Solar, SunedisonIt seems like a win-win on the surface, particularly for Vivint Solar shareholders who saw the price of VSLR stock soar 45%.

Is there any worthy benefit to SUNE investors, however, by bringing the operations of both companies together under one roof?

VSLR and SUNE: The Same, But Different

While both companies are in the solar power industry, SUNE and VSLR are not carbon copies of another.

Vivint Solar is a provider of distributed solar energy installation and financing (more or less) to residential, commercial and industrial customers in the United States. The systems are essentially financed by the savings achieved by switching to solar power, with a “purchase” typically being paid over a 20-year span.

Last year, Vivint Solar drove $25.2 million in revenue, and lost $28.9 million in the process. But VSLR is a young and growing company, and any expenditures that may hurt its income statement in the short term should pay off in the long term. For instance, analysts currently expect Vivint to post a top line of $133.86 million next year, and losses should once again increase.

SunEdison, while similar, is heavier on utility-scale projects and the development of solar power efficiency. In early June, for example, SUNE announced it had won the developmental contract for a 371-megawatt project in South Africa.

SUNE did $2.48 billion worth of business last year, though it still managed to lose $1.18 billion in the process for the same growth-oriented reasons Vivint did.

From that perspective, a blend of the two companies makes good sense. On the one hand, the larger-scale projects SunEdison brings to the table are grand slams, but are part of a long-term sales cycle that requires ultra-competitive pricing. On the other hand, Vivint Solar drives revenue one residential consumer at a time, which has proven to be a consistent and profitable form of cash flow.

That’s the way SunEdison seems to see it anyway, by virtue of its $2.2 billion acquisition offer for Vivint Solar (or $1.9 billion when stripping debt out of the deal).

What’s SunEdison Getting For Its $2.2 Billion?

So why is SunEdison willing to pay $9.89 per share of VSLR in cash plus another $6.60 worth of SUNE stock and debt to current Vivint shareholders (for a total implied value of $16.50 per share) when the pros have modeled a loss of $2.79 per share of VSLR for 2016?

The math admittedly doesn’t make sense, even if Vivint Solar does twice as well as expected on revenue and half as bad as expected on the earnings.

The simplest answer is also the correct one. That is, to SunEdison, getting into the residential installation game with Vivint is worth the high price it’s paying.

Bottom Line for SUNE

While Vivint Solar investors cheered the 45% pop, SunEdison shareholders weren’t necessarily thrilled. SUNE stock was up Monday, but only fractionally. Given the price the company’s leadership was willing to pay, the acquisition announcement should have been met with more enthusiasm from SunEdison owners.

The lack of enthusiasm may well stem from the sizable price tag put on Vivint, as only time will tell if it will be worth the price a few years further down the road.

As rapidly as the rooftop-solar (residential and commercial) industry has grown thus far, the bulk of that growth remains in front of it and the pace is on the verge of picking up. As of 2013, as many as 400,000 U.S. homes had solar panels installed on their roofs, and various estimates peg 2020’s total solar-panel-laden rooftops in the U.S. to reach a figure of anywhere between 900,000 and 3.8 million.

And yet, that would still be a minority of the country’s houses.

There’s another reason SunEdison is in a hurry to get into the residential solar game, however. In 2017, the 30% government subsidy of large-scale projects is set to fall to only 10%, which will spark a sudden drop in utility-scale projects, but shouldn’t affect residential projects.

It still remains to be seen if SunEdison can fully capitalize on the opportunity it’s buying with — and justify what it’s paying for — the purchase of Vivint Solar. It’s difficult to see the good the greater scale has done either company yet. The market is there though, and SUNE has to try something to deal with the upcoming subsidy cut.

The problem is, “has to try something” isn’t an ideal or cost-effective scenario for SUNE owners, and neither company has yet to prove it can turn a reliable profit.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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