Good news for owners of SunEdison Inc (SUNE) … Vivint Solar Inc (VSLR) scrapped its deal to be acquired by SunEdison, sending SUNE stock up more than 11% today.
But, bad news for Vivint Solar shareholders … VSLR shares tanked more than 20%, despite the decision to forego the deal being Vivint Solar’s.
The negated union can’t come as a complete shock. Much has changed with SunEdison, Vivint Solar and the solar power industry as a whole since the acquisition was announced back in July of last year, and some owners of SUNE stock had been suggesting now was not the ideal time to consummate the acquisition.
Nevertheless, the deal’s cancellation at the eleventh hour raises lots of questions, not the least of which are “why?” and “now what?”
Vivint Solar: “Never Mind”
The offer of cash and SUNE stock to VSLR shareholders — $2.2 billion worth — was never viewed as a worthy one by SunEdison shareholders, who simply didn’t see enough value in the 52% premium SunEdison was offering for Vivint Solar — even if it did get SUNE deeper into the residential installation game.
At the time (and to this day), Vivint was driving less than $100 million in annual revenues, and turning very little of that into a net profit. And operationally speaking, Vivint Solar was and still is booking rather heavy losses.
For Vivint Solar owners though, it was a honey of a deal … a lot of money for an unproven organization.
So why would Vivint do the breaking up?
Well, whether it did or it didn’t is a matter of perspective. Vivint claims it terminated the deal because SunEdison never proverbially mailed the check; Vivint can’t wait forever.
It’s not a tough idea to believe. SunEdison’s yieldco TerraForm Power Inc (TERP) and to a lesser extent its companion TerraForm Global Inc (GLBL) — touted during the first half of 2015 — fizzled during the second half of 2015 thanks to a combination of a lack of interest in the overall business model and lack of fiscal success from SunEdison’s operation of the model in the meantime. Simply put, SunEdison CEO Ahmad Chatila spent too much for too little.
Now What?
With or without the deal, solar power as a whole remains a tough industry right now. Contrary to popular belief, though, it’s not cheap natural gas and subsequently cheap coal that’s making it tough to make a buck by providing solar electricity. It’s the supply of solar power and its cost. It’s too available, and it’s plenty cheap.
Last year, more solar power capacity was installed than natural gas power capacity. Simultaneously (and bear in mind this is a contentious suggestion, but the fact that the debate can happen at all is telling), solar power is growing cheaper, and soon may be as cheap as natural gas electricity.
That’s the crux of the reason yieldcos simply aren’t working as a business model. The math of solar power made sense when Chatila was planning on creating TerraForm Global and TerraForm Power. By the time they materialized, though, the math had changed, yet he was still paying premium prices for solar power facilities.
In other words, the struggling yieldcos and SunEdison’s struggle are mostly the result of perfectly bad timing.
As for the future, both the TerraForms are still fighting an uphill battle, but owners of SUNE stock can take a little (OK, a lot of) solace in knowing they won’t be overpaying for Vivint as a way for SUNE to get into the residential solar panel business and get its hands on Vivint’s solar power plants.
But, SUNE is still not in that business, and still wants/needs to be. Don’t be surprised if SunEdison/ TerraForm Power make another similar play — albeit it at a better price — in the foreseeable future.
Bottom Line for SUNE Stock
This chapter of the SunEdison saga is over, but the story isn’t. And though it didn’t end with a victory, it wasn’t a loss for SUNE stock holders either. If nothing else, the affair has (1) forced SunEdison and all solar power companies to rethink the long-term viability of their operations and (2) forced everyone to rethink the value of yeildcos. That’s a good thing, in the end.
That’s not to say yieldcos are a bad business idea, however. As hedge fund manager David Tepper put it, “There’s good value in an independent TerraForm,” alluding to the link between TerrForm Power and SunEdison that almost led the latter to overpay for Vivint. He would arguably know, too, in that he owns nearly 10% of the outstanding TERP shares.
But, inasmuch as TerraForm’s leadership was hand-picked by SunEdison, questions of undue control are still circulating.
As for SunEdison, it too still has problems, but at least it’s not on the hook for $2.2 billion to buy a company worth nowhere near that figure. It also is apt to rethink the generosity of future deals, and perhaps rethink whether or not it wants to get into the rooftop installation business altogether.
That’s a step in the right direction too.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
