Shares of solar installer Vivint Solar (VSLR) jumped 105.5% in July, according to data from S&P Global Market Intelligence, after agreeing to merge with competitor Sunrun (RUN -6.89%). The merger will combine two of the largest residential solar installers in the country and create a potentially disruptive renewable energy stock.
Vivint Solar shareholders will get 0.55 shares of Sunrun when the merger is complete. Sunrun gave the usual rationale for the deal, pointing to $90 million in potential cost synergies and the advantage of having additional scale in the solar industry. But I think the real driver of value could be further down the road.
Sunrun has started building virtual power plants by combining hundreds or even thousands of energy storage units together and offering their charging or discharging services to grid operators. That's how the company can bid energy into competitive power markets across the country, and a larger base of energy storage systems will make these virtual power plants more valuable. Long-term, I think that's where the real value in merging these two companies comes from.
There's no evidence that scale leads to lower costs in the residential solar business, so the value from this deal will probably need to come from the revenue side. Sunrun may be able to raise prices slightly in some locations now that a competitor is out of the market, but the virtual power plant is the real opportunity here. And if Vivint Solar shareholders decide to hold on to their Sunrun shares post-merger, that's where I would look for the biggest opportunity for the companies long-term.