What: Shares of the three companies entangled in SunEdison's (SUNEQ) pursuit of Vivint Solar (VSLR) are trading in wildly different directions today. SunEdison's shares have jumped as much as 33%, and TerraForm Power (TERP) popped as much as 15%, but Vivint Solar plunged 19%.
So what: Vivint Solar announced Tuesday morning that it was terminating its agreement to be acquired by SunEdison. It said SunEdison has failed to "meet its obligations under the merger agreement," and that it will seek legal remedies in association with this "willful breach."
That may sound bad, but from SunEdison's perspective, it gets the company out of a deal it probably didn't want to complete anymore anyway. The company doesn't have the funds to complete the acquisition on its own, and a lawsuit by David Tepper and his hedge fund, Appaloosa Management, had called into question TerraForm Power's willingness to buy $799 million in assets associated with the deal.
For TerraForm, the scuttling of the deal gives it more operating clarity, and means it won't be pushed into making what would have been a highly leveraged purchase of risky residential solar assets. Tepper's lawsuit will likely go away, and there might even by some positive changes to TerraForm's board of directors in response to his pressure.
For Vivint Solar, though, the end of the deal only creates more uncertainty. Residential solar growth is slowing, and we don't quite know where Vivint fits into the future of the industry. The company's management has also likely been distracted preparing for the acquisition rather than focused on running the business. (For possible evidence of that, consider its sequential increase in cost per watt from $3.00 to $3.12 in the third quarter.)
Now what: For all three companies, I think the termination of the deal is good news, but the market's reaction has been short-sighted. SunEdison has long-term structural problems with low margins and rising debt costs. The pressures on it will be eased a little now that it's not completing the Vivint Solar acquisition, but the underlying issues don't go away. SunEdison isn't out of the woods yet.
TerraForm Power is probably the biggest beneficiary because it can rest easy knowing it won't have to buy a mass of allegedly overpriced residential solar assets. Tepper may also push for changes to make the company more stable long-term.
We can't know much about Vivint Solar's future yet, but the company is in better shape than the market is giving it credit for. It has one of the lowest cost structures in the residential solar industry, and even made a profit in 2015. That's solid progress that many competitors haven't been able to show. It's a high-risk stock in today's market, but with over $1.7 billion in contracted payments remaining, the company should be able to create value in the booming solar industry. The market just isn't seeing that long-term vision today.