This will help all to understand the synergies of the acquisiton
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If one form of renewable energy is good, then two must be better. That seemed to be the stock market’s judgment this week when SunEdison, a big developer of solar projects, spent $2.4 billion on wind farms.
Investors bid SunEdison shares up 29 percent Tuesday, the day after the Maryland Heights company agreed to buy First Wind Holdings, a Boston-based wind energy developer. Shares of TerraForm Power, a SunEdison spinoff that will own some of the wind assets, jumped 27 percent.
The companies’ combined market capitalization rose $1.5 billion in a day, and it wasn’t as if they were snapping up assets at a bargain-basement price. In fact, investors were less interested in the engineering required to erect wind turbines on the side of a Hawaiian volcano, as First Wind has done, than in the financial engineering SunEdison is using to make the deal pay off.
“I paid fair market value,” SunEdison Chief Executive Ahmad Chatila told analysts in a conference call. “But because of the way we are designed, we are able to unlock value that other people can’t see.”
The key to that value is the company’s relationship with TerraForm, a so-called yieldco that SunEdison took public in July. It’s technically independent, but SunEdison controls two-thirds of its shares and 95 percent of shareholder voting power. Chatila chairs TerraForm’s board.
SunEdison takes the risk of developing projects, then transfers them to TerraForm once they’re producing steady cash flow. TerraForm makes itself attractive to shareholders by paying a dividend, currently 3.5 percent.
TerraForm thus serves as a vital source of financing. Instead of borrowing money to hold more solar — and now wind — assets, SunEdison in effect sells them to dividend-hungry TerraForm shareholders.
When TerraForm acquires more cash-producing assets, its value rises — and SunEdison benefits through its 67 percent ownership stake. Chatila explained the relationship as a cycle where executives “create volume one place, we make it valuable on the other (and) bring dividends back to the company.”
Michael Gaugler, an analyst at Brean Capital in New York, calls it “a situation where the tail is wagging the dog. The yieldco is really going to influence the SunEdison share price more and more.”
The First Wind acquisition, he said, is very good for the TerraForm tail. In the conference call, executives said TerraForm expects to have $214 million of cash available for distribution next year, up from a previous estimate of $156 million. Its dividend is expected to rise 44 percent.
The strategy is not without risk. Rising interest rates may dim the yieldco’s attraction. Gaugler thinks TerraForm can counter this by raising the dividend, but he adds that “if rates rise, it is a headwind.”
Then there’s political risk. U.S. residential tax credits for wind and solar power expire at the end of 2016, and the Senate’s new Republican majority makes an extension less likely. SunEdison expresses confidence that solar installations will keep growing after 2017, credit or no credit.
The company has been an active dealmaker this year, acquiring several solar projects and spinning off first its semiconductor business, the old MEMC Electronic Materials, and then TerraForm. It has talked about doubling down on the yieldco strategy by launching a company to own projects in emerging markets.
The financial engineering has done wonders for SunEdison shares, which are up 78 percent in the past year. You might say investors were already looking on the sunny side, and now they have the wind at their backs. Less
