Plug Power: A Closer Look At The ReliOn Deal

Apr.11.14 | About: Plug Power, (PLUG)


The ReliOn deal is a minor positive one that gives Plug Power experienced employees, patents and a portfolio of fuel cell stacks for use in its GenDrive products.

ReliOn itself had $5 million in revenue in 2013 and was struggling to reach profitability.

The deal involved issuing 530,504 shares that were likely sold by Cummins (an investor in ReliOn) by April 7.

News involving Plug Power tends to affect share price out of proportion to its importance.

Plug Power (NASDAQ:PLUG) is a company that has attracted enormous interest recently, in large part due to its high volatility and run-up from around $0.50 in November to $7 now. As a result, every piece of news around Plug Power tends to get blown out of proportion from its actual importance. One recent example is its acquisition of ReliOn, which sent Plug Power stock up 4.1% after hours at the time that Seeking Alpha mentioned it.

I'd characterize this move as a positive one for Plug Power, as it takes advantage of its high stock price (which I believe is quite inflated) to add some experienced employees and 34 patents to its portfolio. It will also allow Plug Power to incorporate ReliOn's fuel cell sacks instead of having to purchase them from Ballard Power Systems. Although it is a positive move, it is also a minor one. ReliOn was a $5 million per year business that had reduced its workforce and was unable to reach profitability. This deal allowed ReliOn the opportunity to continue operating, and for one of its investors to recoup some of the money it put into ReliOn.

The Deal

The deal was a positive one for Plug Power as it gained experienced employees, patents, some inventory, and customers that contributed $5 million in revenue to ReliOn in 2013. This was achieved by Plug Power issuing 530,504 shares (valued at $4 million).

Although some have claimed that the fact that the deal was an all-stock transaction reflects confidence in Plug Power's valuation, a closer look at the details of the transaction (see the link to the SEC filing above) reveals this isn't the case. There was a clause in the agreement that in the event that all 530,504 shares were sold by April 7, and the gross proceeds of those shares was less than $4 million, Plug Power would need to make a cash payment to ReliOn for the difference. In essence, the deal pays Cummins (ReLion's creditor/investor) $4 million in cash, but Plug Power pays for it with stock instead of cash. Since those shares were worth less than $300,000 in November 2013, it was a good time for Plug Power to use its shares for an acquisition, in addition to the stock offerings that it has done recently.

About ReliOn

Some digging around news articles has revealed some additional information about ReliOn. It had $13 million in revenue in 2011, falling to $10 million in revenue in 2012 and $5 million in revenue in 2013. Another article mentioned flat growth in 2010 and 2011, so revenue appears to have peaked at $13 million in 2010 as well. The decline in revenues was attributed to a reliance on some large customers that decided not to purchase ReliOn products in recent years. ReliOn was a leader in the backup power fuel cell market, but it was a small market as evidenced by revenue totals.

As a result of the revenue decline, ReliOn reduced its employee count from 45 in 2009 to 15 at the time of acquisition. The deal with Plug Power will allow ReliOn to increase its employee count back up to 25, as it rehires some employees that were recently let go. ReliOn had raised at least $29 million in funding before, but was unable to reach profitability and would have likely run out of money in 2014. Plug Power acquired the company more for its experience and product portfolio than actual business opportunity.

Impact on Plug Power's Financials

As Plug Power mentioned, the deal is expected to have a negative $1 million impact on EBITDA in 2014 and be positive for earnings in 2015. This appears to make sense with 25 employees likely costing around $1.9 million over nine months, while ReliOn's revenue run rate from last year would translate into $0.9 million in gross margin if it had 25% gross margin.

Plug Power's comments around the deal being positive for earnings are likely due to potential cost savings from manufacturing its own fuel cell stacks rather than purchasing them from Ballard Power Systems. Plug Power's cost of product revenue equaled 109% of its product revenue during 2013, so there is significant room for improvement there. ReliOn's profitability aside from that is likely to be minimal at best in 2015.


The ReliOn deal is a positive, but minor one for Plug Power. Plug Power issued 530,504 shares, which Cummins appears likely to have sold by now. In return, Plug Power gets a business that was struggling to achieve profitability, but also experienced employees and a fuel cell stack portfolio that it can use in its GenDrive products instead of needing to purchase them from other suppliers. Ultimately it is a deal that shouldn't have really moved Plug Power's stock much at all. I am short Plug Power due to valuation concerns, and the tendency for its price to overreact to minor pieces of news. Any other minor news of this sort that causes a price increase may represent another opportunity to short Plug Power. Of course, momentum stocks can take on a life of their own for extended periods of time, so one needs to be prepared for that.

Disclosure: I am short PLUG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.