It used to be that the news surrounding SunEdison (SUNEQ) was pretty much always bad news. SunEdison announced the now agreed upon but arguably questionable acquisition of Vivint Solar (VSLR) in July 2015. Crude prices fell substantially because of the oversupply in the sector during the fourth quarter of 2015 and first quarter of 2016. Hedge fund Appaloosa sued in mid-January to prevent SunEdison from selling part of Vivint's portfolio to SunEdison's captive yieldco, TerraForm Power (TERP).
Lately, however, the news flow around SunEdison has started to improve. Crude prices have begun showing signs of life on speculation that Russia might meet with OPEC to cut production. If crude prices jump, MLP yields will decline, and TerraForm Power's yield and SunEdison's cost of capital will become more competitive. Moreover, in late January, David Einhorn's Greenlight Capital, which owns a 6.8% stake in SunEdison, went active and asked the company to make some major changes. Given SunEdison's leveraged balance sheet and the negative sentiment surrounding it, any meaningful good news could send SunEdison shares soaring. Following are three ways SunEdison shares can regain some of their lost ground.
New management
Many investors feel they've been let down by the current management team. SunEdison executives didn't disclose a $739 million recourse balance sheet error until shares traded in the single digits. They also didn't amend the Vivint deal until December. Because management hasn't executed, many investors have taken their losses and stayed on the sidelines. The hesitation of investors to buy in again has increased SunEdison's cost of capital and has made it difficult for the company to grow profitably.
Now SunEdison could be getting some new management, as David Einhorn of Greenlight Capital stated in an SEC filing that his fund might push for "changes to the company's senior management." If an outsider with a track record of executing on promises replaces current CEO Ahmad Chatila, more investors will trust SunEdison's guidance and buy shares, lowering the company's cost of capital and improving its future outlook.
Selling assets at reasonable prices, or selling itself
Selling assets would simplify SunEdison's difficult-to-understand balance sheet, allowing investors to become more comfortable buying into the stock. The cash raised from an asset sale would also reduce liquidity concerns, lowering SunEdison's cost of capital, and trim SunEdison's interest rate expenses if they were used to pay down debt. Given that SunEdison has promised to forgo additional secondaries without a board supermajority, asset sales may be the only realistic option for SunEdison to deleverage.
If SunEdison sold itself, on the other hand, it would presumably be sold at a premium. SunEdison's biggest problem is its high cost of capital. If an enterprising electric utility or another solar company with a strong balance sheet acquired SunEdison, the acquirer could realize substantial synergies and profits because the acquirer's cost of capital would be a lot lower. The probability of an outright acquisition isn't very high, however, until SunEdison resolves the Appaloosa lawsuit.
Winning the Appaloosa lawsuit and retaining control of TerraForm Power
Appaloosa previously sued to prevent TerraForm Power from acquiring part of Vivint Solar's portfolio for $799 million because the hedge fund believes the acquisition would damage TerraForm Power's finances. Credit Suisse analyst salary Patrick Jobin estimates that the Vivint portfolio would fetch $108 million less if it were sold to another party. If Appaloosa wins the lawsuit, SunEdison would need to find another way to finance the deal and would lose that $108 million, which is one-eighth of SunEdison's market capitalization.
Appaloosa also wants to separate TerraForm Power and SunEdison so that future unfavorable transactions don't occur again. Since TerraForm Power has liquidity, and SunEdison doesn't have as much as it would like, separating the two would send SunEdison's cost of capital even higher. If SunEdison can win the lawsuit, however, it would save that $108 million and keep a valuable source of cheap liquidity.
Investor takeaway
SunEdison is the definition of a high-risk, high-reward play. If SunEdison's cost of capital doesn't decline or if the company's liquidity situation worsens, there isn't much value in the common equity. But if SunEdison deleverages smartly, installs new and credible management, and wins the Appaloosa lawsuit, the company will regain some of its lost trust with the market, and its cost of capital will trend lower. If SunEdison's cost of capital falls far enough, the company could make a big comeback.
