The market is fed up with SunEdison (NYSE: SUNE). Its shares have lost more than 90% of its value over the past six months and now according to filings, David Einhorn's Greenlight Capital is looking to sell various assets of the company or even sell it outright. This isn't all Einhorn's Greenlight has been up to. SunEdison has also agreed to a deal with Greenlight not to issue equity for two years without the approval of almost all members of its own board. Adding insult to injury, former Greenlight partner Claire Gogel is also joining SunEdison's board effective immediately.
On a sum-of-the-parts basis, Einhorn has stated publicly that he sees incredible value in SUNE: "SunEdison's core development business is worth $15 per share, the Terraform stake is worth $4.50, the IDRs are worth around $9, and a couple other assets are worth another $3. This sums to about $32 per share, which is a good distance from where the stock is trading."
Is it possible that he's right, and that SUNE is a fantastic steal at today's levels?
What happened?
SunEdison helped pioneer a business model that was incredibly popular with renewable-energy companies. The company would build a solar power plant and simply sell the power plants to a yieldco subsidiary -- that is, a company that owns operating assets that produce cash flow, mainly from long-term contracts. TerraForm Power (NASDAQ: TERP) and TerraForm Global (NASDAQ: GLBL) were SunEdison's associates in this symbiotic relationship.
The business model was brilliant, as it separated the construction and operation risks. The yieldcos would manage the operational aspect while SunEdison would manage the power plant's riskier lifecycle.
Investors were attracted to the high dividends of the yieldcos, which were able to raise cash through equity sales to purchase power plants from SunEdison. However, the recent decline in commodity prices has put pressure on the entire industry, and share prices have plummeted as a result. The share-price decline has made it much more difficult for the yieldcos to offer shares and raise enough money to buy projects from SunEdison. This has left SunEdison with mountains of debt, used to fund projects that it can no longer drop down to its yieldcos.
Einhorn still thinks there's value
SunEdison has long been of Greenlight's most promising investment opportunities - at least according to them. In an Oct. 20, 2014, presentation, Einhorn had this to say about the company:
We believe the market misunderstands SunEdison. The financial statements are complicated because they consolidate the company's interests in several public companies and the non-recourse debt of various solar projects that SUNE controls. This makes it challenging to decipher the economic value of the company from a cursory review of the balance sheet or income statement. We believe this leads to sell-side analysts mis-analyzing the company, and the market undervaluing the stock.
Einhorn has made a name for himself investing in misunderstood businesses and it seems to be more than possible that this time is no different. He could have easily cut and run from this position, but he didn't. He obviously sees exceptional value or he wouldn't have pushed for a board seat so adamantly and increased his position by almost 50% since the beginning of the year. There is a great deal of uncertainty surrounding the stock, so time will tell whether or not he is able to turn things around in the company.
What's next for investors?
Recently, SUNE announced that it would delay its regulatory filing of its 10-K by 15 days. As part of this same announcement, it was put forth that an audit committee that will be looking into allegations made by former executives about the accuracy of its financial position.
It's just a gut feeling, but I believe the audit will yield no new information. And even if it did, it's likely already priced into the shares at current levels. I am focused on the future of the business and the effect that Greenlight will have on the company going forward.
With shares trading at only $2.00, the management and board of directors have lots of room to unlock value at much higher prices for shareholders, while keeping the underlying business intact. Asset sales, or even an outright sale of the company, could fetch multiples of the current share price. As a new board member, Gogel will do everything in her power to unlock some of that value for shareholders -- and for Greenlight.
Seeing the exceptional value of SunEdison on a sum-of-the-parts basis makes it tough to justify these depressed stock-price levels. The markets will eventually find a reasonable price for the company's stock, and I expect it to be far higher than current levels. The current share price, in contrast, appears to offer unique value.
Investor takeaway
There is a lot of noise and uncertainty surrounding Sun Edison. Einhorn's (and Greenlight's) presence should be a welcome sign for investors as he and his team attempt to push for the sale of assets or a change in leadership at the company. This looks like an interesting asymmetric risk-reward opportunity for investors with an appetite for risk, but it is just as possible that SUNE's best days are behind it. Regardless, this is definitely a situation worth following.
