Interest in acquiring a controlling stake in TerraForm Power Inc. (TERP) is heating up, but SunEdison's bankruptcy process may not allow for a solution that shareholders will like. The latest news is that hedge fund giant D.E. Shaw is bidding to buy SunEdison's controlling stake in TerraForm Power, albeit at a discount to what SunEdison thinks the assets are worth.
We know that SunEdison is taking offers for TerraForm Global Inc. (NASDAQ: GLBL), a sister that has a lot of question marks given its international exposure, as well. But can investors in either yieldco count on a positive outcome with SunEdison in charge?
SunEdison playing the slow game
The truth is that TerraForm Power and TerraForm Global are in a situation where they need SunEdison to sell its controlling stake so they can gain the market's confidence, hopefully leading to a higher stock price and lower dividend yields, which will eventually lead to growth once again. But for SunEdison to sell, it wants a price that recognizes the value in the yieldcos before the market has priced it in, something buyers aren't willing to pay for until the yieldcos are free of SunEdison.
D.E. Shaw, Brookfield Asset Management, Appaloosa Management, and BlackRock have all eyed buying the controlling stake in TerraForm Power at one time in the past few months, but none will do so at a premium. D.E. Shaw's latest offer comes without a price but is just an indication that it's interested. And SunEdison hasn't seemed terribly interested in making a deal.
One problem is that SunEdison could just choose to restructure around its stakes in TerraForm Power and TerraForm Global. Slowly but surely, cash flows would come in and creditors would earn some of their cash back, but it's unlikely that either yieldco would bounce back quickly or return to growth.
The faster recovery would happen if a fund bought SunEdison's stake, which is what public shareholders are cheering for, but they're currently not willing to pay the price creditors or SunEdison want for the stake.
A game of chicken with investors watching from the sidelines
If you're a shareholder of TerraForm Power or TerraForm Global, you want SunEdison out of the picture as quickly as possible. D.E. Shaw, or another buyer, could get the company's back-office functions out of SunEdison's hands and bring both companies back up to date with quarterly SEC filings. If they backstopped the companies, they could even attract low cost debt, which would ensure the yieldcos' survival and could send stock prices shooting higher.
But investors are stuck speculating on when a deal might happen and at what price. Eighty-four percent of TerraForm Power's voting shares are currently controlled by SunEdison, so even though hedge funds own a big chunk of shares, they don't have much control of the company.
Wait and see what happens with the TerraForms
It's easy to speculate that TerraForm Power and TerraForm Global could be great values eventually. Based on previous dividends, the stocks yield 10.3% and 27.9%, respectively, at the current stock prices, but those dividends are suspended and may never return to previous levels. And until an operator not named SunEdison is in control of the yieldcos, there's a lot of uncertainty about how big a sustainable dividend would be.
Time will tell what happens, but speculating on a recovery is a risky game, and with funds unwilling to pay up for assets, investors may be stuck with two yieldcos run by SunEdison when it emerges from bankruptcy. And that would be a disappointment for nearly everyone.