SunEdison's bankruptcy has been a nightmare that doesn't seem to end for TerraForm Power (NASDAQ:TERP) and TerraForm Global (NASDAQ:GLBL). The yieldcos created by SunEdison to buy renewable-energy projects have been held back by their bankrupt parent, unable to report financial information to investors, hampering valuation of their stock and operations of their companies.
Both companies may now be looking for a way out from under SunEdison. And that could be great for shareholders.
How the TerraForm yieldcos get out from under SunEdison
As SunEdison is slowly dismantled, TerraForm Power and TerraForm Global are starting to look at their options for the future. One way to move forward is simply for SunEdison to sell its controlling stake in each yieldco, plus the incentive distribution rights. That could allow a buyer of one of the companies to become the controlling interest, which would allow for the return of financial statements and a dividend. That's the simple solution, but it may not be best for the yieldcos.
What's being floated now is the entire sale of the yieldcos. Rather than just buying a stake in a yieldco, a buyer would get all of the company's projects and associated contracts. This may be an attractive option for a utility or private equity firm that has a low cost of capital and doesn't want to deal with owning a stake in a publicly traded company.
The fact that TerraForm Power and TerraForm Global are being shopped is good news for investors, but the options being given to potential buyers are important as well.
Why buyers want the whole company
If someone were to simply buy SunEdison's stake in either TerraForm yieldco, it would still have to take on that yieldco's cost of capital and operations. Without a wholesale change in the market's thoughts on the company and/or a sharp rise in yieldcos in general, it could take years for the stock to reflect what a buyer thinks the shares should be worth.
What could be more attractive is for a large company with a low cost of capital to fold the yieldco's assets into its own operations. If they were bought at the right price, the upside potential could be huge. That's what NRG Energy (NYSE:NRG) was thinking when it paid $144 million for 2.1 GW of projects from SunEdison. But it was arguably a low price because NRG Energy has risk in executing its plan to complete projects and extract value.
By the same token, a buyer would likely have to renegotiate debt financing for the yieldco's projects, and even negotiate contracts with utility off-takers because a change of control would technically put them in default. But the lower cost of capital could make those risks worthwhile.
Companies like NRG Energy, D.E. Shaw, or NextEra Energy (NYSE: NEE) probably wouldn't be interested in buying shares of a yieldco; they'd want full control of projects to make a deal worthwhile. That's why a sale of the entire yieldco is a good option to explore.
This story is far from over
Shares of both TerraForm Power and TerraForm Global are rising on speculation that a sale would unlock value in the companies, and that could be the case. But don't set high expectations for what a sale might bring. NRG Energy's acquisition of SunEdison assets came for pennies on the dollar of what those projects may have been worth a year ago. The same could happen to the TerraForm yieldcos in their bid to find a buyer.