Why the Vivint Solar Buyout Is the Strongest Solar Endorsement Yet

July 20, 2015 by Paul Ausick

Solar rooftop installation
Source: Thinkstock
SunEdison Inc. (NYSE: SUNE) announced Monday morning that it has reached a definitive agreement to acquire Vivint Solar Inc. (NASDAQ: VSLR) for approximately $2.2 billion in cash, stock and convertible notes. The purchase price includes about $263 million in Vivint debt. A subsidiary of SunEdison’s yieldco, TerraForm Power Inc. (NASDAQ: TERP), will acquire Vivint’s rooftop solar portfolio from SunEdison concurrently with the completion of the acquisition of Vivint.

Vivint shareholders will receive $16.50 per share, consisting of $9.89 in cash, $3.31 per share in SunEdison stock and $3.30 per share in SunEdison convertible notes. SunEdison plans to issue approximately $370 million of its common stock and approximately $350 million of SunEdison convertible notes to Vivint Solar stockholders as merger consideration. At Friday’s closing price of $10.88, the purchase price reflects a premium of about 52%.

SunEdison has been very aggressive in expanding its footprint. Last July’s spin-off of TerraForm Power was followed just two weeks ago by a $2 billion acquisition of wind power-generation plants from Invenergy Wind. Competitors First Solar Inc. (NASDAQ: FSLR), SunPower Corp. (NASDAQ: SPWR), NRG Yield Inc. (NYSE: NYLD), Abengoa Yield PLC (NASDAQ: ABY), Pattern Energy Group Inc. (NASDAQ: PEGI) and, with this new acquisition, SolarCity Corp. (NASDAQ: SCTY) have been — or will soon begin — playing catch-up.

A yieldco is a separate, publicly traded company formed by an alternative energy provider to hold the cash-generating assets of the provider’s clean energy generating assets. NRG Yield and Abengoa Yield were created in 2012 and 2013, respectively. Pattern Energy was also founded in 2012. First Solar and SunPower created and took public a yieldco of their own, 8point3 Energy Partners LP (NASDAQ: CAFD) last month.

The price of solar energy poker just went up. Probably way up.

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Vivint is partly an installer of solar energy systems and partly a utility company that collects payments from customers who sign power-purchase agreements or lease solar energy systems. The first part of that business competes directly with SolarCity; the second part competes with the yieldcos. SunEdison, which already has a construction and installation business of its own, will keep that part of Vivint’s business and hive off the other part to the new subsidiary of TerraForm Power.

SolarCity becomes the focus of acquisition attention now. The company’s market cap is north of $5 billion, while Vivint’s totaled about $1.15 billion before Monday’s announcement. SolarCity’s business is similar to Vivint’s, but SolarCity’s first-quarter revenues totaled almost $67.5 million, compared with Vivint’s $9.5 million. SolarCity shares closed at $52.15 on Friday, and an acquisition of the company will be very expensive now that SunEdison has set the bar.

Could either First Solar or SunPower have a reasonable play to acquire SolarCity? Very unlikely without some financial engineering that will leave current shareholders with a bad case of the jitters. First Solar had about $1.5 billion in cash and equivalents at the end of the first quarter, and if we consider a premium of at least 30% to SolarCity’s stock price on Friday, a $6.5 billion price tag is pretty much out of reach.

SunPower’s cash position is less than half that of First Solar, and its long-term debt was creeping close to $1 billion at the end of the first quarter. Chances that SunPower could make a play for SolarCity seem even more remote.

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NRG Yield is already saddled with $4.8 billion in long-term debt, Abengoa Yield’s long-term debt totals $2.3 billion and Pattern Energy’s long-term debt is $1.3 billion.

Could the two combine to make an offer? Perhaps the 8point3 yieldco could make an offer for SolarCity’s power contracts? Anything is possible, but neither of these strikes us as particularly likely.

Another — and highly unlikely — acquisition option might be Real Goods Solar Inc. (NASDAQ: RGSE), an early player in the residential solar installation business. The company’s stock was up 10% Monday morning to around $1.85 a share. Its market cap is around $13 million. But the company either sells outright or helps consumers and businesses arrange financing. It has nothing to add to an acquirer’s yieldco business.

One final possibility is a bidding war for Vivint. That makes a little more sense for First Solar and SunPower, but none of the others are likely to ante up. But if either First Solar or SunPower does decide to make the play, the company has to be in it to win it. Even at double the price SunEdison is offering, Vivint is cheaper than SolarCity.

Investors appear to be seeing it pretty much the same way. TerraForm Power’s stock was down about 1.5% in early trading Monday morning, while SunEdison’s stock was up nearly 5.5% and Vivint stock soared, up 45%.

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