Beleaguered solar company SunEdison Inc. SUNE and its YieldCos – TerraForm Power Inc. TERP and TerraForm Global Inc. GLBL – witnessed a sharp rise in share prices yesterday. SunEdison gained 14.8%, while TerraForm Power and TerraForm Global climbed 24% and 11.6%, respectively.
What Drove the Optimism?
The rally came after SunEdison revised the terms of its much-criticized deal to acquire Vivint Solar Inc. VSLR, a residential solar energy provider. As per Bloomberg, the revised terms led to at least 25% reduction in the initial bid of $2.2 billion.
Per the new terms, SunEdison slashed its cash offer on Vivint Solar by $2.00 to $7.89 per share. However, it raised the stock component by 75 cents per share to $4.06 in SunEdison stock.
In July, the two companies entered into a cash-stock merger agreement. According to the terms of the deal, Vivint shareholders would have received $16.50 per share — $9.89 in cash, $3.31 as SunEdison stock, and $3.30 in the form of SunEdison convertible debt.
Further, per the old agreement, SunEdison would have got $922 million by selling Vivint Solar’s rooftop solar power portfolio to a subsidiary of TerraForm Power. Now, TerraForm Power will pay only $799 million for the same portfolio.
SunEdison lowered the price amid persistent pressure on TerraForm Power by David Tepper’s hedge fund company, Appaloosa Management. Tepper currently holds 9.5% stake in TerraForm Power.
In a letter to TerraForm Power CEO Brian Wuebbels, Tepper stated that the acquisition will only benefit SunEdison and questioned the fairness of the acquisition to TerraForm Power. He also wrote that the deal "forces TerraForm Power to acquire inferior rooftop assets at an inflated price in order to subsidize the cost of the SunEdison/Vivint merger."
In addition to the price cut, a $250 million loan from Blackstone Group to finance the acquisition was also responsible for pushing the stock up. The acquisition is anticipated to close by the end of first-quarter 2016.
What’s Troubling SunEdison?
Once the favorite of hedge fund managers, SunEdison has lost over 88% value from its 52-week high of $33.45 attained on Jul 20. Over the last two quarters, hedge fund companies with significant stake in the renewable energy developer have lost millions due to the massive plunge in its share price.
Investors are becoming increasingly skeptical about the company’s revival as it struggles to finance the projects. This is because of a tremendous rise in debt due to the string of acquisitions made over the past one year.
SunEdison has been on an acquisition spree since the last year to strengthen its position as a renewable energy developer. In an effort to diversify its portfolio, the company acquired First Wind and Solar Grid Storage.
These acquisitions, once believed to be strategic, are now burning a hole in SunEdison’s pocket. The acquisitions have taken a toll on its balance sheet with total outstanding debt (including current portion) nearly doubling to $11.7 billion at the end of third-quarter 2015 from $6.3 billion a year ago.
The negative operating cash flow indicates that SunEdison has not been able to generate enough cash to cover operational costs and, so, had to raise more debt.
Furthermore, the disappointing third-quarter results by SunEdison’s YieldCos have raised investors’ concerns. A YieldCo is a publicly-traded company formed to own operating assets that produce cash flow, which is then distributed among investors through dividends.
In other words, YieldCos buy finished projects developed by the parent company, thereby freeing up capital to spend on more projects. A parent company with a highly leveraged balance sheet has difficulty completing projects, while a cash-strapped YieldCo has difficulty paying off its financers. SunEdison is facing trouble on both the fronts.
TerraForm Power reported loss per share of 3 cents comparing unfavorably with the Zacks Consensus Estimate of earnings of 28 cents. On the other hand, despite incurring narrower-than-expected loss, TerraForm Global’s revenues of $29 million missed the Zacks Consensus Estimate of $34 million.
Both the YieldCos lost over 61% and 38% value, respectively, since the results were released. Moreover, on Tuesday, shares of TerraForm Power and TerraForm Global were trading at a discount of more than 74% and 68% to their respective 52-week highs of $42.66 and $14.10.
As both the parent company and the YieldCos are trading at a significant discount, it has become difficult for these companies to sell shares in the open market at attractive valuations and raise funds.
The prospect of a near-term interest rate hike by the Fed is not helping the YieldCos. Higher interest rates make such high-yielding stocks less attractive and raise the cost of financing projects.
YieldCos need to issue new shares (generally at higher prices than their IPOs) from time to time to raise capital for new investments as most of their cash flow is used up for dividend payments. However, SunEdison’s YieldCos are facing difficulties on this front due to plummeting share price.
Conclusion
Although slashing its offer price to acquire Vivint Solar by one-fourth is a positive, we believe that much needs to be done to improve SunEdison’s liquidity position. We do not expect this Zacks Rank #3 (Hold) stock to gain much in the near future.
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