Is SunEdison's Semiconductor Spinoff As Good As It Looks?

Shares of silicon-wafer maker SunEdison (NYSE: SUNE  ) exploded 16% upward Thursday in excess of enthusiasm over the company's announcement that it plans to spin off its SunEdison Semiconductor unit in an IPO early next year.

But is all the enthusiasm justified? Let's find out.

Reviewing SunEdison's financials for full-year 2012, back when the company was still known as MEMC Electronic Materials, we can quickly see why SunEdison is choosing to spin off its semiconductor business rather than its solar-energy business. For one thing, solar energy generates about twice the revenues ($1.6 billion annually) for SunEdison that semiconductors ($917 million) contribute. For another, solar energy is a profitable business, earning $162 million in pre-tax profit, whereas semiconductors lost SunEdison $5 million last year.

These facts explain why SunEdison might prefer to keep solar energy and get rid of semiconductors. However, they don't tell the whole story. Fact is, SunEdison as a whole lost money last year, which probably isn't the result you'd expect from a business composed of two units -- one significantly profitable pre-tax, and the other only marginally unprofitable. The reason is that according to S&P Capital IQ, SunEdison classified $100 million in losses last year as arising from "corporate" and other sources.

If split proportionally between the two main businesses, however, these "corporate" losses would have sapped about $64 million away from the solar energy business' profits. As a result, it's likely that after spinning off semiconductors, SunEdison's remaining solar-energy business will still be earning only about $98 million annually -- and not the $162 million investors are counting on.

That's a big difference -- the difference between a post-spinoff company earning operating profit margins of more than 10%, and a business eking out only a 6% operating margin post-spinoff. And that's the good news.

The bad news is that SunEdison itself says next year's IPO will only dispose of  "a minority ownership interest" in SunEdison Semiconductors, leaving the parent company still holding a controlling interest in its unprofitable semi-division.

Foolish takeaway
Long story short, this week's spinoff announcement does little to change the financial picture at SunEdison. The company might be generally less profitable with semiconductors than without. But merely getting rid of part of the problem won't be enough to make this company a very profitable enterprise.

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  • Report this Comment On August 24, 2013, at 11:24 AM, ykim1988 wrote:

    You're very good at looking at minute details which are not even relevant to the matter you discussed here. Do you even know what they make under semiconductors umbrella? It's called wafers.

    Have you looked at their long term chart before solar? There were two big picks (I meant BIG) and about 10 years +/- in between. That's what it used to be their typical business cycles. It's coming back in a few if not next year.

    You have to see the big picture. Solar is definitely picking up and Semi can even bigger than Solar in short term. It will generate more profit next year.

    They have two great business segments. It's not about $162 million or $5, moving around. Each will have more than 2B market cap in 2 years if not 2 digit B. Be open minded and learn a bit about Semi - cycles first.

  • Report this Comment On August 25, 2013, at 9:45 AM, chrisceeaustin wrote:

    The author has not listened to any of the recent conference calls, just looking at a few numbers. SUNE is about to quadruple their solar sales. In order to quintuple or multiply sales by six, they need further financing, and the spinoff gives them far, far more than enough. They will likely expand panel production in Mexico, Malaysia, Delaware, etc. and with full force inject themselves into distributed generation, taking market share with their greater experience from the likes of SolarCity. This author has no idea what SUNE will do with this huge capital injection because he has not been paying attention. Even without the spinoff, they will make 250 MW of solar project (they did about 50 in Q2) sales in Q4 and with this capital, they will soar. Plus with just a minority share sale, they maintain their solar wafer supply! Incredible.

  • Report this Comment On August 27, 2013, at 10:15 AM, kirkydu wrote:

    I have been discussing MEMC / SUNE for well over a year here see my list. Also in early June discussed a likely spin-off here http://www.marketwatch.com/story/two-hot-solar-stocks-but-on...

    Author might have wanted to clarify the corporate expenses he alludes to for readers. Most were one time or had to do with dealing with refinancing the company from debt load. Finances have gotten much better, solar is growing fast and proceeded from partial spin-off will finance further solar growth both in EPC and solar financing for residential and smaller commercial.

  • Report this Comment On October 06, 2013, at 11:20 AM, FarrellPower wrote:

    SunEdison has multiple liens on their sites in Ontario, Canada. I do not see much of a future for a company that does not pay their bills. This is public knowledge and can be accessed by any investor who chooses to do their due diligence.

    I am coining the term Shady Eddy for them.

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