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How SunEdison Could Buy Vivint Solar And Be Worse Off for It

By Travis Hoium - Feb 9, 2016 at 1:30PM

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The Vivint Solar acquisition may be completed after all, but that's not necessarily good for SunEdison.

Image source: SunEdison.

SunEdison Inc. (SUNEQ) may complete the Vivint Solar Inc. (VSLR) acquisition just yet, but it could be costly for the company. TerraForm Power (TERP) , the entity which is supposed to buy operating assets from Vivint, is trying to wiggle its way out of said residential solar assets with billionaire David Tepper's Appaloosa Management suing to block the deal and he may actually be successful.

How could a buyout still occur given SunEdison's financial weakness? Here are a few options.

Drop assets down to TerraForm Power
One scenario is that the acquisition goes off as planned with TerraForm Power paying $799 million for 523 MW of residential solar assets as planned. That's the purchase Tepper is trying to get out of, but it's possible that it's too late to back out or that Tepper loses his lawsuit.  

The problem is that the acquisition could be bad for TerraForm Power in a number of ways. The company had just $636 million in cash as of Sept. 30 and already had $2.5 billion in debt on the balance sheet. It added another $475 million in debt to finance U.K. projects recently, not coincidentally leaving $800 million in cash but buying Vivint Solar assets would stretch the balance sheet further.  

TerraForm Power buying Vivint Solar assets could help SunEdison's bid to become a bigger developer, but it could also stretch the yieldco to its limit, leaving it unable to buy projects in the future. That's not the place SunEdison wants TerraForm Power to be. 

Large power plants like this one are what TerraForm Power really wants to own. Image source: SunEdison.

Sell Vivint Solar assets
An option that's gotten some attention lately is the idea of selling Vivint solar's operating assets to someone else. The question is: To whom?

A private equity firm may take the assets if they got the right deal and another yieldco could buy them if the price is right. But it's unlikely anyone would pay as much for the assets as TerraForm Power would. The $1.76 per watt TerraForm originally agreed to pay was just a 9.5% cash-on-cash yield (cash generated per year divided by the purchase price) and while the $1.53 per watt in the modified deal is lower, it's still probably not a low enough price to attract a lot of buyers. Plus, SunEdison would likely have to hold the operating and maintenance contracts for most buyers, eating up even more value.

It's possible that Vivint Solar's operating assets could be sold  to a third party but that kind of sale at that size would be the first of its kind and I doubt anyone would pay a premium for assets when competitors like SolarCity and Sunrun are trading at a discount on the market.

Sell other assets
The most likely scenario is that SunEdison is forced to sell renewable energy projects or part of its pipeline to fund the acquisition. But again, it'll likely have to sell at a distressed price. Buyers know that SunEdison is desperate and with yieldcos dropping over the past six months the number of buyers may be small.

The problem with this kind of sale is that SunEdison may be selling highly reliable utility scale projects with 30 or 40 year lives for residential solar assets that have uncertainty over their 20 year contracts and a world of uncertainty after that.

Why a share sale isn't happening
You may think that SunEdison could just sell some shares of stock to fill the gap and all would be well, but that isn't happening. As part of hedge fund manager David Einhorn's agreement to put a Greenlight Capital representative on the board the company agreed not to dilute shareholders with a stock sale unless there was a supermajority of the board of directors in favor of such a deal.

Plus, at Monday's closing price SunEdison itself was worth just $783 million, so a share sale to fund the acquisition would have to be massive.

All bad options for SunEdison
The Vivint Solar acquisition puts SunEdison in a tough position and Tepper's lawsuit isn't helping matters. I think we'll hear about more asset sales in the coming months as a way to free up some liquidity on the balance sheet to complete the acquisition and even pay down debt. But asset sales take away some of that value SunEdison has been building and it leaves the company more desperate to find ways to build and sell projects in the future.

SunEdison is in a vicious cycle and I don't see it ending well for the company. Vivint Solar may be acquired after all, but it could cost SunEdison more than it's worth, if it hasn't already.

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