Energy Business

The Solar Consolidation Phase May Just Be Starting (JASO, LDK, JKS, SPWRA, TOT, RSOL, WFR, FSLR, ESLR, ENER, TAN)

The merger and consolidation phase in solar may be getting underway.  Solar PV maker JA Solar Holdings, Co., Ltd. (NASDAQ: JASO) has reached an agreement to purchase privately held Silver Age Holdings Ltd., a company controlled by JA Solar’s chairman, and that owns Solar Silicon Valley Electronic Science and Technology Co., Ltd., a wafer maker with production facilities in China. JA Solar will issue about 31 million new shares at $5.825/share, a premium of just 5% above JA Solar’s closing price yesterday.

The deal follows a recent host of share buybacks and other acquisitions in the solar PV space. Earlier this week LDK Solar Co. Inc. (NYSE: LDK) announced $110 million share repurchase plan. JinkoSolar Holding Co. Ltd. (NYSE: JKS) authorized a $30 million share repurchase plan in May, while the biggest deal was the acquisition of a controlling interest in SunPower Corp. (NASDAQ: SPWRA) by Total SA (NYSE: TOT) for nearly $1.4 billion. Real Goods Solar, Inc. (NASDAQ: RSOL), a solar PV installer, based in Colorado, acquired privately held Alteris Renewables Inc., a Connecticut-based installer, for around $20 million. Don’t think for a second that these are just one-off deals.

In 2010 downstream acquisitions were all the rage. Several solar PV makers bought project development companies. MEMC Electronic Materials Inc. (NYSE: WFR) acquired SunEdison, and First Solar Inc. (NASDAQ: FSLR) acquired NextLight Renewable Power. Japan’s Sharp Corp. (OTC: SHCAY) paid $305 million for project developer Recurrent Energy, and SunPower bought SunRay Renewable Energy for $277 million. The string has about neared its end though, with MEMC’s June 2011 acquisition of Axio Power, a developer of utility-scale solar projects in Canada and the US.

Large, privately held downstream companies are now essentially gone. Solar PV makers wanting to grow either have to build new capacity or look elsewhere in the value chain for opportunities. JA Solar has done both. The company plans to expand production capacity from 2,500 megawatts to more than 3,000 megawatts by the end of the year. The company’s CEO also said that JA Solar would expand wafer production capacity to 600 megawatts by December 2011.

Today’s announcement boosts JA Solar’s 300-megawatt wafer capacity by 485 megawatts, to 785 megawatts, more than 30% higher than the 600-megawatt plan. Clearly JA Solar got a good deal, paying just a 5% premium. But was it a sweetheart deal? JA Solar’s chairman owns 70% of the acquired company. How does that figure in?

Whatever. Solar PV stocks are depressed by a glut of capacity coming online in 2011 that is expected to push supply about 12% ahead of demand. JA Solar, for example, has a trailing P/E of 2.98 and a forward P/E of 4.63. The stock’s price/book ratio is a paltry 0.82. LDK Solar’s numbers aren’t any better, and JinkoSolar’s are only marginally higher.

There could be substantial value in these stocks as the solar PV industry consolidates. To unlock that value is the trick. As installation costs for crystalline solar PV fall every solar PV maker will feel the margin pressure. The traditional way of overcoming that problem is to double down on capacity and cut costs even more as the industry enters a commodity phase.

The companies best positioned to survive are the Chinese, which have proven their ability to get government support when necessary to keep the industry thriving in China. Not all the Chinese makers will survive, but the solar PV industry will and that is what the country’s government wants to see.

US-based companies, with the exception of First Solar, Inc. (NASDAQ: FSLR) are struggling. Evergreen Solar Inc. (NASDAQ: ESLR) is inches away from collapse. Energy Conversion Devices, Inc. (NASDAQ: ENER) is trading at barely above $1/share, has a negative trailing and forward P/E, and few prospects for getting well again.

The downstream acquisitions of the past year or so were not about consolidation, but about growth. Now we should begin to see some consolidation in the industry as every supplier comes under margin pressure.

JA Solar shares are trading down about -2% in early trading today, at $5.46, in a 52-week range of $4.48-$10.24. On a broader front, the Guggenheim Solar ETF (NYSE: TAN) is up more than 1%, to $7.19, in a 52-week range of $6.52-$9.34.

There is one last issue here.  Even if mergers pick up in the solar space, there is no assurance that high premiums will be paid.  Those old highs at the peak of the solar and energy bubble from late 2007 into 2008 will have little relevance.

Paul Ausick

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