Credit Suisse
Solar report out today.
Yet another US solar pipeline acquisition.
Sharp acquires Recurrent Energy
Bottom line.
Yesterday, Sharp signed an agreement to acquire 100% of Recurrent Energy for $305mm in cash and balance sheet adjustments. This is the sixth major solar pipeline acquisition in the last 12 months – it validates FSLR's strategy to be more active downstream. As a side note, the implied value of SPWR's pipeline using comps from these deals is about $4.75/share; Woongjin stake is worth about $2.63/share - implying the core SPWR factory assets, IP and brand are being valued at just $5/share - a level not out of the realm of possibility to attract interest from potential bidders.
Background.
Recurrent Energy is an IPP and solar project developer, based out of San Francisco. Recurrent has about 329MW (of which 170MW is in Canada) projects contracted in North America, and a non-contracted pipeline of ~1.67GW of viable solar projects.
On paper, the acquisition price (see math below) seems fair, but it is a bit harder to ascertain the quality of Recurrent’s contracted pipeline versus other contracted pipelines (eg Nextlight). We have seen at least 6 high profile solar pipeline acquisitions in the last 12 months (MEMC for Sun Edison, SPWR for Sunray (Europe), FSLR for Nextlight, NRG for Arclight, FSLR for Edison Mission Group’s solar pipeline, and now Sharp for Recurrent Energy; see charts). Near term this flurry of pipeline M&A and comp valuation validates FSLR’s strategy of building a US downstream presence medium term. We have noted that besides the companies that are already active in US pipeline M&A, others like GCL Energy, GE, Samsung, AUO, large European IPPs, and even large China panel companies like TSL may have interest in acquiring similar solar pipelines.
Thoughts on Sharp/Recurrent deal valuation.
We have noted that Recurrent’s pipeline assets may have been for sale (see Pg 4 in FSLR note dated July 1, 2010 titled “Antelope Valley and other US projects update”). FSLR paid $285mm for Nextlight pipeline (530MW PPA + 570MW pipeline). If you assume 5MW of pipeline is worth 1MW of contracted PPA, then FSLR paid approximately ~44c/watt for Nextlight. Sharp is paying $305mm for Recurrent (330MW of PPA, 1670MW of additional pipeline). Using a similar math, Sharp is paying ~43c/watt for Recurrent. At first glance, the valuation appears comparable to the Nextlight deal. Valuing SPWR's pipeline on a similar formula and its pipeline and Woongjin Energy stake is ~$7.34/share compared to SPWR's current trading price of ~$12.5.
Motivation for Sharp & Recurrent.
Sharp is very active in the US, and has the #2 spot behind SPWR on applications and completed projects as part of the California Solar Initiative. Until 2007, Sharp used to be the largest supplier of solar panels, until Q-cells overtook in 2008, and of course since then FSLR and China solar companies have established market dominance. By acquiring a downstream pipeline in the US, Sharp can get access to some captive demand for its panels (although Recurrent management suggested other panel vendors will still have opportunity to sell to the Recurrent pipeline). In addition, Sharp will get access to detailed module performance data for its competitors, which could help to position its product somewhat near term. Recurrent may have been under time pressure to complete certain projects in its PPA, particularly its 170MW of Canadian projects, or else face penalties – having a large company like Sharp take over the pipeline may help move volumes through the pipeline.
Market trends.
We believe Recurrent Energy is likely sourcing its modules from a variety of suppliers in the range of $1.50 – 1.60/W today, and likely is hopeful of seeing $1.40/W pricing levels. Major China based panel suppliers are completely sold out for 2H10 demand, and in the few instances where extra panels are available, there appear to be several buyers willing to pay $1.90/watt+ for October deliveries (we have even heard of $2/watt pricing for China panels). We have noted a negative comp from Czech market as we move from 4Q10 to 1Q11 – but we also note that right now, China based panel suppliers are growing a bit more confident on 1H11 outlook despite the Czech trends, and are hopeful of maintaining prices > $1.60/watt in 1H11. Clarity on geographical demand evolution in 1Q11, and spot price trends for key solar components will be of interest over the next few weeks. |
