When First Solar (FSLR -0.90%) announced it would "review alternatives for the sale" of its stake in 8point3 Energy Partners (CAFD), it was a bit uncertain who the buyer might be. SunPower (SPWR -1.48%) wouldn't be able to buy the stake itself and any new partner brought in would need to bring its own pipeline of projects, according to 8point3 CEO Chuck Boynton.
The most likely option may be an all-out sale of the yieldco. One interesting buyer could be NextEra Energy Partners (NEP), the competing yieldco in the space, thereby creating a juggernaut small solar yieldco space. Here's why the deal makes sense for everyone involved.
Image source: First Solar.
The yieldco arbitrage
The goal of any yieldco is to buy projects that have a higher rate of return than the cost of issuing new shares and/or debt. For example, a $100 million project with an 8% internal rate of return could be purchased with $50 million of 4.5% debt and $50 million of stock with a 6% dividend yield. The implied gap between the 8% and the weighted cost of capital of 5.25% would help fund future dividend growth.
NextEra Energy Partners is using this structure to buy new projects, but it could use the same dynamic to buy all of 8point3 Energy Partners. And since NextEra Energy Partners has a 4.3% dividend yield and 8point3 Energy Partners has an 8.4% dividend yield, it would essentially be performing dividend arbitrage. Here's what the math might look like.
A buyout of 8point3 Energy Partners
8point3 Energy Partners has about $700 million in net debt, which would need to be acquired or refinanced in a buyout. On top of that, the purchase price would have to be attractive to First Solar and SunPower. Based on an analysis I did last week, let's use $950 million as the equity portion of the buyout, which would equate to a 7% discount rate and the assumption of $1 per watt in terminal value after initial contracts run out. For this $1.65 billion purchase price, NextEra Energy Partners would get $140 million in annual project-level cash available for distribution.
If NextEra Energy Partners used $2 in debt to each $1 in equity for the acquisition, it could issue $1.1 billion in debt and $550 million in equity. Let's say debt is available at a 4.5% interest rate and equity would have to be issued at a 5% dividend yield, a slightly lower price than where shares trade today ($28.20 per share is used in this example). In total, cost of capital would be 4.67%, or $77 million per year, to fund interest payments and the dividend of shares issued. That would leave $63 million to amortize project-level debt or increase the dividend.
Why this would be good for everyone
For example, if $550 million in shares were issued at $28.20 per share, NextEra Energy Partners would have about 73.7 million shares outstanding (assuming no new shares issued after year end 2016), or 175.4 million at the OpCo level, which includes NextEra Energy's stake. It would also have about $90 million in additional CAFD ($140 million less the $50 million cost of debt) to add to $230 million to $290 million in CAFD at the end of 2016. At the midpoint, that would be $350 million in CAFD, enough to pay a $2.00-per-share dividend. That would be enough to grow the dividend 15% annually from $1.41 per share last quarter through mid-2019. In one acquisition, NextEra Energy Partners could guarantee its promised dividend growth of 15% annually to nearly 2020.
For First Solar and SunPower, the cash from a buyout would be a boost to their balance sheets. First Solar would get $266.3 million in cash and SunPower would get $347.8 million cash, which both companies could use to upgrade their manufacturing capacity.
These calculations are illustrative of how 8point3 Energy Partners could be accretive to NextEra Energy Partners in a full acquisition. And it could be a deal that could be good for everyone involved. At the end of the day, this may be the kind of buyer 8point3 Energy Partners looks for in a potential sale.
