SunEdison's (NASDAQOTH:SUNEQ) acquisition spree continued today when it announced the $2.2 billion acquisition of Vivint Solar (NYSE:VSLR). The move suddenly makes SunEdison the second largest residential solar installer in the U.S. and gives it a fleet of thousands of sales people.
It's also a bold move to expand across all major downstream markets in solar. SunEdison is now one of the largest residential, commercial, and utility scale project builders in the U.S. Here's what the deal means for everyone involved.
The acquisition details
SunEdison has agreed to pay $16.50 for Vivint Solar, which will be paid as $9.89 per share in cash, $3.31 per share in SunEdison stock, and $3.30 per share in convertible notes from SunEdison. $263 million of debt will also be repaid as part of the transaction by SunEdison.
At the time of acquisition TerraForm Power (NASDAQ:TERP) will buy 523 MW of Vivint Solar projects for $922 million, paid for by $737 million in stock and $225 million in HoldCo level debt.
SunEdison is also taking out a $500 million non-recourse 1st lien term loan, which will be paid for by cash from Vivint Solar's operations over the next five years.
For Vivint Solar investors who don't want to take on a SunEdison note, they should cash out their shares before the transaction closes, which is expected to be late this year.
Why this deal makes sense
On a few levels this acquisition makes sense for both sides. For Vivint Solar being under SunEdison's wing gives them access to a large financing arm and the yieldco TerraForm Power. In a highly competitive market with players like SolarCity (NASDAQ:SCTY.DL), who has a larger footprint and is even more vertically integrated, having SunEdison's scale should also give some stability to Vivint Solar's business.
For SunEdison this is a big move into residential solar and expands its commercial solar presence. It also makes the company a major competitor with SolarCity, especially given the infrastructure and data it now has to expand into new markets like energy storage.
According to SunEdison's management, the combined companies "cost structure will be beyond world class", taking direct aim at SolarCity's vertically integrated model. But SunEdison's recent acquisition spree also brings up major questions for the company.
Questions about SunEdison's future
In acquiring Vivint Solar, SunEdison has acquired a nice portfolio of operating assets. But it also acquired a development company that will add both operating costs and investment requirements in the future. The residential business is also in a strange strategic position, focusing on leases with escalators while the market moves more and more toward loans and sales to customers.
During the conference call to announce the acquisition SunEdison's management touted Vivint Solar's $0.14 per kWh average power purchase agreement rate with a 2.9% escalator. But this could lead to higher costs for solar energy than grid energy in the future if grid costs don't increase faster than 2.9%. There's also the fact that homes turn over to new homeowners on a regular basis, meaning the counterparty risk today will look very different than the counterparty risk a decade from now.
This is all very different from SunEdison's current business, which primarily sells energy directly to utilities under long-term contracts. Can SunEdison really fold all of these solar ambitions into one organization? It's at least a question worth thinking about over the next few years.
On top of all of this is the biggest concern SunEdison's investors should have: Debt!
At the end of the first quarter the company had $9.2 billion in debt and it's safe to say that number will rise through the end of this year. For a company reporting net losses and negative cash flow from operations there's a lot of optimistic assumptions built into the stock.
What will make or break SunEdison and Vivint Solar
At the end of the day I think this marriage, and the entire SunEdison investment thesis, boils down to how well the company can integrate all of its pieces and create a smart energy company that can offer solar, wind, energy storage, demand response, energy monitoring, and other solutions to customers in the future. That's when they'll be able to generate the kind of value they need to in the renewable energy industry.
Until then, I'm seeing a company that continues to pile on debt by buying companies that will require billions more in investment in the future. That makes me leery, especially in an industry where debt has been the #1 predictor of failure.