On Jan. 25, Vivint Solar (NYSE:VSLR) filed its Proxy Statement for the Special Shareholders Meeting to be held on Feb. 24 to approve its acquisition by SunEdison (NYSE:SUNE). As documented in a well written article by EnerTuition, VSLR has steadily reduced its forecasts of residential solar installations since the July 2015 announcement of the deal and in fact VSLR had disclosed a meaningful decline in forecasts in the midst of the renegotiation of the terms of the acquisition in early December 2015. Unfortunately, the conclusion of the article, that this disclosure provides an opening for SUNE to wiggle out of the acquisition, is incorrect. SUNE would have worked on the Proxy and it would be well aware of the disclosure regarding VSLR's business. In addition, SUNE agreed on revised acquisition terms and incorporated them into a revised merger agreement with VSLR subsequent to the first reduction in projections. The legal constraint on SUNE and the reason it never challenged the deal in court was the restrictive Material Adverse Effect clause that was included in the original and revised Merger Agreement. So the disclosures in the Proxy Statement do not represent a new opportunity for SUNE to challenge the deal.
Instead, the Proxy Statement for the Special Shareholders meeting provides a definitive time frame for the closing of the acquisition of VSLR by SUNE. The Special Shareholder meeting is scheduled for Feb. 24 so the acquisition will close on or shortly after shareholder vote approving the deal. Since Blackstone is contractually obligated to vote for the deal and owns more than 50% of VSLR and there is no obligation to obtain an affirmative vote from the majority of the minority (i.e., non-Blackstone shareholders), Shareholder approval is a foregone conclusion.
The question that usually arises at this point is whether David Tepper and Appaloosa have blocked the closing of the deal through the lawsuit against TerraForm Power (NASDAQ:TERP) and the answer is no. SUNE is obligated by the Merger Agreement to close the deal regardless of whether TERP closes on its agreement to purchase the portfolio of VSLR operating residential solar assets. If TERP has been enjoined by a court, on a temporary or permanent basis, from closing on the asset purchase agreement, SUNE will need to fund that portion of the transaction with internal funds or additional external financing. The prospective Feb. 24 closing date is actually a bit of good news since it provides SUNE an additional month to find a third party to acquire the VSLR residential solar portfolio or arrange additional on balance sheet financing. SolarCity (NASDAQ:SCTY) was able to recently source on balance sheet financing for a portfolio of its residential solar assets so there is cause for optimism.
There is another possible positive interpretation of the Proxy filing. SUNE did not have the legal basis to challenge the transaction under the Material Adverse Effect clause, however, SUNE could reject the transaction in bankruptcy. If VSLR believes that forcing SUNE to close the transaction on or around Feb. 24 will not result in a bankruptcy filing, then this is good news for SUNE shareholders. The other possibility is that they are playing a high stakes game of chicken due to their own liquidity issues. I prefer the positive interpretation.
VSLR's disclosures are certainly disappointing but not unexpected given the liquidity constraints that VSLR was struggling against as it tried to complete the deal with SUNE. On December 2, VSLR filed an 8K stating that they renegotiated the $350 million Aggregation Facility with ML. Here is an excerpt from the 10Q:
As of Sept. 30, 2015, the Company had incurred an aggregate of $183.0 million in term loan borrowings under the Aggregation Facility. The remaining borrowing capacity was $192.0 million as of Sept. 30, 2015. However, the Company does not have immediate access to the remaining $192.0 million balance as future borrowings are dependent on when it has solar energy system revenue to collateralize the borrowings.
It appears that ML increased the interest rate in return for greater flexibility in borrowing under the Aggregation Facility. The amount of the line did not increase because additional debt was not allowed under the Working Capital Facility (see below). My interpretation is that this was a sign of liquidity problems at VSLR. If they thought they had sufficient liquidity to carry them past March 18, 2016, the termination date of the original Merger Agreement with SUNE, they would not have renegotiated this line.
Per the 10Q, VSLR had $86.25 million in unrestricted cash and accounts receivable at Sept. 30, 2015. Excluding related party accounts payable and the current portion of capital leases, VSLR had $143 million of accounts payable at the same date. VSLR has a working capital line with Goldman Sachs of $150 million. Here is a quote from the 10Q:
As of Sept. 30, 2015, the Company had incurred an aggregate of $70.0 million in borrowings under the Working Capital Facility. Further, the Company established a letter of credit under the Working Capital Facility for $3.3 million related to an insurance contract. As such, the remaining borrowing capacity was $76.7 million as of Sept. 30, 2015. ... The Company is also required to maintain $25.0 million in cash and cash equivalents and certain investments as of the last day of each quarter. ... Among other restrictions, the Working Capital Facility provides that the Company may not incur any indebtedness other than that related to the Working Capital Facility...
Therefore, net of the $25 million cash balance required under the ML Working Capital Facility, VSLR had $137.7 million of cash, accounts receivable, and undrawn amounts under the Working Capital Facility vs. $143 million of Accounts Payable as of Sept. 30. In addition, VSLR's SG&A, R&D and Interest Expense exceeded third quarter revenue by approximately $18 million. Since there are less hours of sun during the 4th quarter and VSLR did not announced any initiatives to reduce expenses, this shortfall would increase during the fourth quarter.
The timing of cash flows associated with the cost of installation of new roof top systems and the release of funds from the tax equity partners and from the Aggregation facility is a bit opaque and difficult to ascertain but we can all agree that VSLR is a consumer of capital for this purpose. The fact that VSLR had to renegotiate the ML aggregation line was a sure sign of liquidity issues. It was their "Last Chance Saloon" to gain more time in order to try to close the SUNE deal.
SUNE had the leverage to negotiate much better revised terms for the VSLR acquisition in early December and management failed woefully. What they achieved in the way of a price concession was very thin gruel. The disclosures in the Proxy statement just adds to the frustration regarding the poor negotiating performance of management. This poor negotiating track record spurred Einhorn to become more involved with the day to day management of the company through a board seat and avoid reckless equity dilution by requiring a super-majority board vote for future equity issuance.
The VSLR acquisition is on track to close by SUNE and it is doubtful that VSLR would risk pushing SUNE into bankruptcy by forcing the close. It will not be smooth sailing from here, but SUNE will begin a long-term recovery after it closes the VSLR deal and gets past its earnings release.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SUNE over the next 72 hours.
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.