SunEdison: The Renewable Supermajor Stumbles
Has the fastest growing solar company overheated its operating model?
In 2015, SunEdison was positioned to be the “first Renewable Energy Supermajor” with over 6 GW of solar and wind projects under operation and a pipeline of 8.1 GW of renewable energy projects.[1] On July 20, 2015, SunEdison announced a $2.2 billion acquisition of Vivint Solar, a residential solar installer.[2] Shortly after, SunEdison’s stock price went into free fall and plummeted from $33.45/share to $8.31/share.[3] The company’s aggressive growth strategy now threatened to compromise its own operating model.
Business Model
SunEdison’s core business is to develop large-scale solar and wind projects and then to sell these projects to third-parties or its “semi-captive yield companies” for a profit. [4] These projects require a significant capital investment upfront, but have no fuel costs and low operating costs over the project’s twenty-year life. In addition, large-scale projects produce reliable, high-margin cash flows through long-term power purchase agreements with electric utilities.[5] SunEdison’s business model depends on acquiring, developing, and constructing energy projects in high-resource locations. As a result, the company relies on a large development pipeline to sustain its growth. Currently, SunEdison has 1.9 GW of projects that are under construction and 8.1 GW of projects in its development pipeline.[6] In addition to organic development, SunEdison has tripled its project pipeline over the past year by aggressively acquiring other energy developers, including First Wind for over $2 billion in 2014.[7]
Operating Model
SunEdison’s profitability depends on executing low-cost projects. The company’s operations are vertically integrated and the technical, construction, and business development teams support projects from early stage through operation.[8] By reducing the development timeline for projects, the company is able to more accurately estimate project costs, win competitive bids for utility-scale generation, and deliver projects under budget. SunEdison has capitalized on falling solar panel prices through its own manufacturing operations and by partnering with low cost module suppliers to ensure that its projects have access to the cheapest panels available.[9] Finally, SunEdison has used innovative financial engineering through yield companies in order to reduce its cost of capital and access new sources of funding before a key tax credit expires at the end of 2016.[10]
Vivint Acquisition
On July 21, 2015, SunEdison announced that it would acquire Vivint, the second-largest residential solar installer in the country and its 523 MW portfolio of rooftop solar projects.[11] The Vivint acquisition would provide SunEdison with a new team for originating rooftop solar projects through Vivint’s door-to-door sales model. In addition, SunEdison could use Vivint’s portfolio of rooftop solar projects to expand its own development pipeline and sustain the company’s ambitious levels of growth.[12]
The Vivint acquisition, however, did not align with SunEdison’s operating model. SunEdison has achieved record growth by pursuing large, high-margin projects that were guaranteed by contracts with utilities. Vivint, on the other hand, focused on small-scale, low-margin projects with high customer acquisition costs. Vivint has competed successfully against other rooftop solar companies, such as SolarCity, by using a door-to-door salesforce to generate leads and close rooftop solar deals. By contrast, SunEdison’s internal teams are organized to take a utility-scale project from site selection to construction within two years. Once a project began construction, it would be at least nine months before the project was operating and could be sold to a third-party.[13] Moreover, the business development and project finance teams at SunEdison did not work directly with customers or with small-scale projects. Instead, the business development team primarily focused on other developers and the project finance team negotiated with banks and tax equity investors to secure financing for individual projects. To support the Vivint sales model, SunEdison would need to completely overhaul its operating model or to create two distinct operating models within the company.
The Market Reacts
Today, SunEdison’s share price has fallen below $5 per share as the company struggles to integrate Vivint’s line of business into its operating model.[14] At this point, SunEdison’s market cap of $1.25 billion is lower than its $2.2 billion acquisition of Vivint and it may be forced to walk away from the deal.[15] After the market repudiated SunEdison’s acquisition spree, the company’s business model is now in jeopardy and it has recently announced plans to cut back significantly on growth. SunEdison will need to pursue a more disciplined path to growth in order to become the next energy supermajor.
[1] SunEdison Conference Call with Investors, July 22, 2015.
[2] SunEdison Press Release Announcing Vivint Acquisition, July 20, 2015.
[3] Seeking Alpha: “The Case Against SunEdison,” September 9, 2015.
[4] The Motley Fool: “How Can SunEdison Save Itself?”
[5] ValueWalk: Bronte Capital Raises Further Questions about ‘the SunEdison complex,'” September 18, 2015.
[6] SolarServer: “SunEdison announces 1.9 GW under construction, project pipeline adds up to 8.1 GW,” August 6, 2015.
[7] Forbes: “SunEdison’s Big Slide When Financial Engineering Goes Wrong,” November 13, 2015.
[8] Conversations with SunEdison employees in May 2015.
[9] Seeking Alpha: “The Case Against SunEdison,” September 9, 2015.
[10] Seeking Alpha: “SunEdison Should Walk Away,” November 12, 2015.
[11] SunEdison Conference Call with Investors, July 22, 2015.
[12] Greentech Media: “Feeding the Beast: SunEdison Plans to Buy Vivint Solar,” July 20, 2015.
[13] Conversations with SunEdison employees, May 2015.
Hi L (whoever you actually are),
This was a very enlightening article and kind of surprising for me at least. I am having difficulty understanding why the stock price spiraled down after the acquisition. As per my understanding, even if the operating models for the two companies are different, they could still operate as separate entities under one umbrella. Just because the parent company relies on high margin big projects, and Vivint being focused on lower return market should not hamper the conglomerate. I would like to get further into the details of the acquisition and the balance sheet financials for SunEdison, prior to the acquisition. After doing a bit research, what I understand is that SunEdison was never in a position to acquire Vivint solar. Not sure if you agree with my thought process, but I would like to get your thoughts on this……….
Thanks for this article and super interesting! While I can understand why market would react not so positively on the acquisition of a low return and high risk entity because of it being in the direct consumer space. I still see this as an exciting opportunity for SunEdison to create a larger ecosystem and longer value chain from utility to end consumer. I am curious to understand if the reaction is much more drastic because of the potential of tax credits expiring in the near term future. The tax credits, as you have mentioned, have allowed easier access to capital for both utility and consumer based companies and hence, I wonder if it is the compounded effect of the risk that has brought down the stock prices. You mentioned there is a probability for SunEdison to walk away from this deal. That could be quite probable. Do you think there is a timing issue as well and that this merger could make more sense in the coming years? Thanks.
Very interesting article. I am also puzzled by the decline in the stock price, I wonder if there were more general market forces that contributed to such a performance (some people mentioned the expiration of the tax credits, could it be also related to the overall poor performance of energy stocks recently?). From what I can tell and from a quick read on the internet (see link below), it seems like there were good synergies between the two companies. Vivint would benefit from the vertical integration and manufacturing expertise of SunEdison and SunEdison will get access to Vivint’s residential market. From what I know, companies typically merge when their operations complement each other, not when they overlap. Though I understand that SunEdison business model was initially targeting large scale projects, the addition of Vivint is not such a bad move if the integration could be executed properly. In any case, this is a very puzzling outcome, also given the fact that market reactions are often irrational.
http://seekingalpha.com/article/3751986-revised-vivint-solar-sunedison-deal-is-a-positive-for-both-companies
Thanks L (whoever you are as Azeem said). So I actually did some work on SUNE in my last job. Sunedison is a sum of the parts play that works very much like the Real Estate Investment Trust (or REIT) model. They have a main development business that then sells to an affiliated YieldCo (at a fair value price) – in the case of Sunedison the YieldCo is TerraForm Power, Inc (or NASDAQ: TERP) . This is an effective business model because it generally allows investors to divorce the different types of risks and return (i.e. one which is a capex intensive development business and succeeds by finding and executing on high quality projects and the other being a less risky play that allows investors to enjoy dividends from the relatively safe, long term utility contracts once these solar plants have already been built).
The issue with Sunedison is that it’s all jumbled together within the parent. SUNE owns 50% of TERP (and a similar emerging markets YieldCo) so you are buying both when you invest in just the parent. TERP’s success all depends on taking advantage of the total potential market out there for solar (solar still only makes up less than 0.5% of total global electricity generation!) and soak up as many projects as possible to maximize its dividend. I think this is where the Vivint comes in. Many believe ITC tax credit that is ceasing at end of 2016 is expected to disproportionately impact the utility sector of solar versus residential. Vivint is a leader in door-to-door residential (hence the operational differences L alluded to) I’m sure SUNE felt that combining the companies could help alleviate some of these tax credit concerns. In this case you saw them sacrificing the operational model in the face of business model pressures. However, I’m not sure if it’s a bad idea given the circumstances. Like Nishika and Mepossi mentioned the writing has been on the wall for some time in relation to this tax credit reduction and I’m sure SUNE felt like they had to do something – relying on these “large high-margin” utility projects alone may not have been a long-term feasible option for them either.
For everyone, here’s an article that I think helps breakdown some of the things I mentioned: http://www.forbes.com/sites/joecornell/2015/09/25/re-look-at-sunedison-sune-terraform-power-terp-terraform-global-glbl-valuations/
L thanks for this, shoot me an email if you can. I have a feeling that SUNE could be cheap now (and thus a worthy investment) but definitely would appreciate another perspective.
Great post, L. And some very interesting comments too. I think the reasons for the plunge in SUNE since the summer can be broken down into two categories – market-driven and management-driven.
As we all know, oil prices keep falling and have brought down the entire energy sector. It is perhaps unfair that SUNE has been affected by this as rarely is oil used for electricity generation. However, one hypothesis is that YieldCos (see Adam’s post above) and MLPs (oil pipelines), given their common characteristics, share many of the same shareholders, who dumped their holdings indiscriminantly as they sought to exit the sector. This would support the idea that TERP is undervalued and now is a good time to invest.
The problem for SunEdison is that management has pursued a very aggressive, highly levered growth strategy without anticipating the impact of the market moving against them. In fact, Vivint represents its third multi-billion acquisition in the past year. Had YieldCo valuations not taken a nosedive, SUNE would have been fine, since it could always access cheap capital through the YieldCo by dropping down (selling) operating assets. However, with YieldCo yields now too high to support drop downs, SUNE is now stuck with no obvious buyer for its operating assets, meaning no easy source of capital, and is suddenly facing liquidity questions. The recently announced restructuring of the Vivint acquisition ($2 less cash per share) has brought some relief and consequently, SUNE and TERP stock has shown a slight recovery over the past week.
Finally, to address L’s point of Vivint being a poor fit, I would argue that not only is it a poor fit for SunEdison, the bigger issue might be that it’s a poor fit for Terraform. Like Adam eloquently explained, the whole idea of the YieldCo is that it holds operating assets that the parent has developed, providing a safe and steady stream of cash flows that can be paid out as dividends to investors. It works well with utility-scale projects as the counterparties are generally highly creditworthy utility companies. However, with Vivint, you are now dealing with individual homeowners, whose creditworthiness is highly variable and oftentimes suspect. By acquiring Vivint, SunEd is compromising the integrity of Terraform’s cash flow streams, which could have serious repercussions on how investors view the attractiveness of the vehicle.
Very interesting post, L.
Similar to the comments mentioned above, I don’t think that SUNE’s acquisition of Vivint was a mistake in itself. There were clear synergies in that both are solar developers, and had opportunities to integrate their supply chain of solar modules and equipment. The two companies even complement each other in terms of market coverage: SUNE specialized in large utility-scale projects, and Vivint specialized in smaller residential and commercial projects. DoYouEvenLiftBro’s reasoning that it was poor fit for Terraform makes sense. Adding residential and commercial projects to a YieldCo’s portfolio does change its profile. I also agree that SUNE’s issues are mostly due to liquidity concerns that have risen out of their aggressive acquisition strategy.
Given that utility scale projects are now very cheap to develop (as low as $1.6/Watt-DC), I doubt the drop in ITC is what might have driven investors wary. The market, and solar companies, have known about this for a very long time and have prepared themselves for that moment.
It would have been interesting to see what processes SUNE applies for project development, so that they keep their development costs low. I see this company as a capable developer where their business models and operating models generally align well. The drop in their stock price is largely a reaction to management’s strategy of aggressive acquisition.
I know TOM Challenge is over everyone but wanted to send this out! ITC tax credit extension in play now. Major potential win for Solar names
http://www.bidnessetc.com/59425-sunedison-inc-solarcity-corp-heres-why-solar-stocks-are-up-today/