The drama between SunEdison (SUNEQ), TerraForm Power (TERP), and Vivint Solar (VSLR) hasn't died down in 2016 -- it's only heated up. This week, news broke that David Tepper's Appaloosa Management has filed suit against SunEdison and TerraForm Power to try to block the latter buying assets from Vivint Solar.
TerraForm Power has always been key to the Vivint Solar acquisition, and losing it could cause the deal to fall apart. But that may not be bad for everyone involved.
TerraForm Power as a tool for SunEdison
One of the core questions surrounding the Vivint Solar deal is the role TerraForm Power plays with SunEdison. Is the company a tool for SunEdison to drop down assets as it pleases, or is it an independent company that should make independent decisions in the best interest of its shareholders?
That question is at the core of Tepper's lawsuit and his letter to the board of directors late last year calling into question "obvious conflicts" between the two companies. In a board meeting in November, TerraForm Power lost two independent directors, a director from a major shareholder quit, and the CFO of SunEdison was announced as CEO of TerraForm Power.
One of the goals of that letter was to get TerraForm Power to act more independently, which included backing out of the Vivint Solar acquisition. If completed, the deal would bring "high risk" residential solar assets onto the balance sheet of a company that had previously focused on lower risk projects with energy sold to utilities.
With the deal expected to be completed sometime this quarter, Tepper is seeking "immediate injunctive relief" to block the acquisition. He would like to see TerraForm Power be a utility scale solar company, not a residential solar company.
TerraForm Power's cash spend is massive
For TerraForm Power, Vivint Solar is a big deal no matter how you look at it. Under terms of a modified Vivint Solar acquisition, TerraForm Power cut its cash acquisition of residential assets from $922 million to $799 million. Some of that was from a lower price per watt, but most was a decline in MW acquired. That sounds nice, but keep in mind that unlevered cash available for distribution will be about $73 million for those assets, a yield of just 9.1%.
TerraForm Power also recently completed the $1.96 billion acquisition of Invenergy assets, which comes with expected unlevered CAFD before debt of $139 million. That's a CAFD yield of just 7.1%, and a $500 million term loan has a variable interest rate of at least 6.5%.
Remember that these acquisitions are happening as TerraForm Power carries a dividend yield of 14% based on last quarter's payout. Perhaps the company would be better off paying down debt, paying dividends, or even buying back shares than buying assets that can't meet the company's current cost of capital?
What happens next
All three companies have stubbornly moved forward with the merger, but I think all three would be better off if it didn't get completed. SunEdison could do without the debt and the distraction residential solar would bring. TerraForm Power should focus on lower risk projects and de-leveraging its balance sheet. Even Vivint Solar may be better off as an independent company now that the solar investment tax credit has been extended.
If the deal isn't called off we could see modifications, like selling rooftop solar systems to third parties. But we don't know what price a third party may be willing to pay, so that's a wild card.
The drama at SunEdison continues, but now the debate will enter the court room. I think the Vivint Solar acquisition is in trouble, and no matter what company you might be invested in, that's probably a good thing.