Nearly a year after First Solar (FSLR 0.63%) decided it was going to seek strategic alternatives for its stake in 8point3 Energy Partners (CAFD +0.00%), a deal has finally been announced. Asset manager Capital Dynamics will acquire the company with one of its investment funds, along with some co-investors, for a total enterprise value of $1.7 billion.
First Solar and SunPower (SPWR +0.00%) will sell their stakes in 8point3 Energy Partners for $12.35 per share plus some accrued cash available for distribution. Here are the details you need to know about this deal from all three companies' perspectives.
Image source: SunPower.
The deal details
The $12.35 per share buyout price, or $977 million in equity value, is 13.6% below where shares closed on Monday, so the market obviously thinks this is a disappointing price. You can see that it's also below where the stock has traded for most of its life as a public company.
8point3 Energy Partners will continue paying its Q4 2017 dividend rate of 28.02 cents per share quarterly, so the full payout between now and closing will likely be slightly above the headline buyout price of $12.35 per share. Management said the deal is expected to close in the second quarter, which ends May 31 for 8point3 Energy Partners, or in the third quarter.
Why the price is so low
8point3 Energy Partners was in a tough position given its high dividend yield, making acquiring growth projects difficult. So any acquirer was looking strictly at the cash flows of the projects the company owned.
This became tough in recent quarters. Interest rates are rising, meaning the resulting value of projects with contracted cash flows is lower. On top of that, low power purchase agreement prices in the U.S. means that the terminal value, or value of projects after their initial contract, is lower than what investors had previously expected.
Clearly, buyers weren't putting much of a premium on First Solar and SunPower's assets, and even thought the market's price for the stock was too high. That's why the deal looks so disappointing today. But 8point3 Energy Partners probably didn't have a lot of options.
What happens now
Both First Solar and SunPower have said they want to liquidate their positions in 8point3 Energy Partners to generate cash they can use in their core businesses. Based solely on the buyout price of $12.35 per share, First Solar will receive about $273.1 million and SunPower will get $356.7 million, minus fees.
The cash is far more critical to SunPower, which has $300 million of convertible debt coming due on June 1, 2018. This will all but ensure that debt isn't a problem for the company, and eases debt pressure for a few years. SunPower still has $825 million of convertible debt outstanding after the 2018 note, but nothing is due until 2021.
Given the language in the 10-K filed late Monday, it looks like First Solar and SunPower will be able to generate continued revenue from 8point3 Energy Partners projects through operating and maintenance (O&M) contracts. O&M is a great long-term business for solar companies, which are often better suited to perform monitoring and maintenance than pure asset owners like Capital Dynamics.
Moving to the next chapter
First Solar and SunPower appear more than ready to move beyond this tumultuous chapter in their history. SunPower has all but abandoned its utility-scale solar development business, and First Solar has greatly reduce its developments and wants to sell what it does develop earlier in the process. Instead, both companies will focus on solar panel and other component sales to third-party developers, which should reduce their exposure to the fluctuation in project values we saw affecting 8point3 Energy Partners.
This will add to First Solar's cash cushion, which is one of its biggest strengths in solar today. For SunPower, the infusion of around $350 million will be a critical source of cash to pay down debt and potentially fund a plant that could help it get around newly implemented tariffs.
While the sale price is disappointing, First Solar and SunPower are probably both happy to be moving on from 8point3 Energy Partners with some extra cash in their coffers. At the end of the day, that's why they were willing to settle for a pretty disappointing buyout price.
