Shares of silicon-wafer maker SunEdison (OTC:SUNEQ) exploded 16% upward Thursday in excess of enthusiasm over the company's announcement that it plans to spin off its SunEdison Semiconductor unit in an IPO early next year.
But is all the enthusiasm justified? Let's find out.
Reviewing SunEdison's financials for full-year 2012, back when the company was still known as MEMC Electronic Materials, we can quickly see why SunEdison is choosing to spin off its semiconductor business rather than its solar-energy business. For one thing, solar energy generates about twice the revenues ($1.6 billion annually) for SunEdison that semiconductors ($917 million) contribute. For another, solar energy is a profitable business, earning $162 million in pre-tax profit, whereas semiconductors lost SunEdison $5 million last year.
These facts explain why SunEdison might prefer to keep solar energy and get rid of semiconductors. However, they don't tell the whole story. Fact is, SunEdison as a whole lost money last year, which probably isn't the result you'd expect from a business composed of two units -- one significantly profitable pre-tax, and the other only marginally unprofitable. The reason is that according to S&P Capital IQ, SunEdison classified $100 million in losses last year as arising from "corporate" and other sources.
If split proportionally between the two main businesses, however, these "corporate" losses would have sapped about $64 million away from the solar energy business' profits. As a result, it's likely that after spinning off semiconductors, SunEdison's remaining solar-energy business will still be earning only about $98 million annually -- and not the $162 million investors are counting on.
That's a big difference -- the difference between a post-spinoff company earning operating profit margins of more than 10%, and a business eking out only a 6% operating margin post-spinoff. And that's the good news.
The bad news is that SunEdison itself says next year's IPO will only dispose of "a minority ownership interest" in SunEdison Semiconductors, leaving the parent company still holding a controlling interest in its unprofitable semi-division.
Long story short, this week's spinoff announcement does little to change the financial picture at SunEdison. The company might be generally less profitable with semiconductors than without. But merely getting rid of part of the problem won't be enough to make this company a very profitable enterprise.