Why Didn't Total Buy All of SunPower?

Why didn't Total (NYSE: TOT  ) buy all of SunPower (NASDAQ: SPWR  ) ?

Total is a big company. It has yearly revenues of $222 billion and net income of around $11 billion a year. It could afford a company of that size. Today the French super-major only owns 66% of SunPower.  

So why did Total leave the SunPower stub?

Tough deal to do at the time
In April 2011, when it acquired 60% of SunPower, Total paid a per share price of $23.25. SunPower now trades around $33, so in retrospect that seems like a great move. 

But at the time of the acquisition, the solar industry was falling apart. The industry faced a huge supply glut in addition to lower subsidies. At the time, most market participants thought SunPower shares would head significantly lower, and they were right. In December 2011, when Total decided to purchase an additional 18.6 million shares, the oil super-major only had to pay $8.80 per share. 

Buying more of SunPower at the time looked like a bad move.

Insulation from infighting
According to SunPower, the sum of all electricity sales around the world amounts to $2.2 trillion annually. 

As solar panel costs come down, SunPower will likely get a larger part of that market. But affordable solar would also harm Total's natural gas unit, which could cause infighting. As a rule, in larger companies, if something is working well, most do not see the need to change. Because of this, they sometimes miss out on big industry shifts. By keeping SunPower separate, Total can insulate SunPower from that thought process.

Faster speed and better incentives
One of the reasons why start-ups in Silicon Valley succeed is because they move faster than bigger companies. Generally the more people there are in an operation, the slower the decision making. If SunPower were part of Total, one could argue that it wouldn't move as quickly.

Also, because SunPower is independent, SunPower management has greater incentive to grow the company. Because we're still in the early innings for solar, shares of SunPower have plenty of room to run. A company Total's size would not be able to match SunPower's growth rates.  

The bottom line
Another reason for the SunPower stub could be that SunPower management needed the support, but didn't want to sell the entire company. In 2011, the solar industry underwent what the financial industry underwent in 2008. Like Goldman Sachs and GE, which looked for support from Warren Buffett in 2008, SunPower looked for help from a friendly participant with deep pockets. It found Total, and the deal worked out. 

In hindsight, the deal was a win-win for both companies.

Because it was under the Total umbrella, SunPower had a lower cost of capital and more business connections. With that competitive advantage, SunPower grabbed market share from weaker players in the rooftop solar space and leveraged connections to win contracts in the utility-scale solar space. The company is now profitable and can grow on its own.

For Total, owning two-thirds of SunPower was a successful hedge against an increasingly fossil-free future. 

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  • Report this Comment On February 24, 2014, at 10:16 AM, clanza875 wrote:

    Total also has about 10 million warrants on SPWR that would expire worthless if they increase their ownership percentage above a certain level. Why buy out the existing shares when you can just dilute them down to nothing?

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