A leading provider of semiconductor and solar chips, MEMC Electronic Materials Inc. (WFR) recently announced the termination of the solar wafer supply agreement between its Singapore unit and Suntech Power Holding Co. Ltd. (STP). MEMC will receive a handsome $120.0 million from Suntech for the termination.
The original deal between MEMC Singapore Pte Ltd. and Suntech, the leading Chinese solar energy company, was struck in 2006. Per this 10-year deal, MEMC was required to supply solar wafers at a predetermined price. As an advance, Suntech deposited a certain security amount and allowed MEMC to take over up to a 4.99% stake in it.
However, persistent downturn in polysilicon prices led the companies to amend the contract twice in 2009. Accordingly, prices were cut and volumes were raised. But as further price declines were noticed during the first half of this year, MEMC and Suntech mutually consented to put an end to the contract.
Suntech’s termination payment will comprise a $67.0 million irrevocable letter of credit and retention of $53.0 million cash previously deposited with MEMC. Now that the contract has ceased, Suntech will be able to save roughly $400.0 million over the next five years. The company also intends to set up its own fab, which will help in cutting down the manufacturing cost of solar panels. Things are not so rosy for MEMC however.
The declining price of polysilicon is putting MEMC on the back foot. The impact was also felt on a 10-year MEMC-Conergy deal. In January 2010, MEMC reached an out-of-court settlement with Conergy, to amend the contract that was highly beneficial to its financials. The amendment called for a significant reduction in the minimum quantity of wafers that Conergy was required to purchase over the remaining eight years of the agreement. The amendment also required pricing to be determined based on market rates, similar to other MEMC long-term solar wafer supply agreements.
The termination of the Suntech deal and amendment of the agreement with Conergy will have a negative impact on both revenue and margins of the company. MEMC did not comment on the impact of the termination on its second quarter earnings, saying that it was in the process of determining the impact.
However, we still remain somewhat positive on MEMC’s solar initiatives. The company recently announced the extension of an agreement with the Electronics Manufacturing Services provider Flextronics International Ltd. (FLEX). Under the extended agreement, MEMC Singapore and Flextronics will combine forces to fabricate solar panels for SunEdison, a subsidiary of MEMC.
Moreover, MEMC also entered into a 50-50 joint venture with JA Solar Holdings Co. Ltd. (JASO) in March. The two companies have agreed to build and operate a solar cell production facility in China.
Currently, MEMC has a Zacks #3 Rank, which indicates a short-term Hold recommendation.
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