On January 25, 2016, Vivint Solar (NYSE:VSLR) filed its Definitive Proxy Statement for the Special Shareholders Meeting to approve its acquisition by SunEdison (SUNE). The Special Shareholder meeting is scheduled for February 26th, which means the acquisition of VSLR by SUNE will close on or shortly after February 26th (this prior article explains why). Unfortunately, on January 12, 2016, the hedge fund Appaloosa filed a lawsuit in the Delaware Chancery Court asking the court to enjoin TerraForm Power (NASDAQ:TERP) from purchasing the VSLR portfolio of operating residential solar assets as contemplated under the "Purchase Agreement" between SUNE and TERP ("Appaloosa Case").
The next hearing date for the Appaloosa Case will occur on February 16th during which Appaloosa and other plaintives will press for a temporary enjoinder against TERP from fulfilling its contractual obligations under the Purchase Agreement and a permanent rescission of the Purchase Agreement. If the court grants a temporary enjoinder prohibiting TERP from fulfilling its obligations under the Purchase Agreement or grants a permanent rescission, SUNE is still contractually obligated to close the acquisition under the Amended Merger Agreement and this will necessitate SUNE drawing on various term facilities, credit lines, and internal cash to fund the entire cash portion of the Merger Consideration as well as other expenses and requirements under the Amended Merger Agreement.
This confluence of events and the uncertainty of the outcome of the Appaloosa Case begs the question, what happens from a cash flow perspective if TERP is enjoined from closing on the Purchase Agreement? The following is an attempt to quantify an answer to that question.
As disclosed in the VSLR Preliminary Proxy filed on December 22, 2015, there were 116,763,387 shares outstanding, including 10,187,237 shares underlying outstanding employee stock options and restricted stock units. The per share cash component of the Merger Consideration is $7.89 and comprises the bulk of the cash needed to fund the close of the Merger. Presented below are two Sources and Uses tables: the first assumes TERP is enjoined from closing on the Purchase Agreement and the second assumes TERP fulfills its obligations under the Purchase Agreement. The assumptions used in compiling each are provided as a brief analysis.
- Common Stock: Preliminary Proxy (see above) 106,576,150 shares times $7.89 Base Cash Consideration.
- Options & RSUs: Definitive Proxy page 125, $46.4 million value of officer options and RSUs is increased an additional 20% (Morningsidepark estimate) for non-officer employee options.
- Bonuses: Definitive Proxy page 129.
- Repmt VSLR Working Capital Facility: Definitive Proxy page 73.
- Fees & Expenses: Morningsidepark estimate.
- Fees and Discount on Term Facility: $300mm face value of the facility less the $258 million net proceeds disclosed on quarterly cash flow forecast on page 15 of the January 5th Business Update.
- VSLR Aggregation Facility: Definitive Proxy page 7.
With the exception of my estimation of the investment banking fees and financing origination fees and the non-officer employee options, the information used to compile the sources and uses of cash flow in the VSLR deal comes from the Proxy statements and the January 5th Business Update. The $1,031.4 million of cash needed to close the merger detailed in the USES column of the table is significantly in excess of the $550 million shown on page 14 of SUNE's January 5th Business Update, which equals the sum of the Term Facility and the Blackstone Loan (313 is the name of the Blackstone investment vehicle that currently owns VSLR shares and will lend $250 million to SUNE to finance the Merger, see Sources in the table above).
On page 15 of the January 5th Business Update, a quarterly cash flow forecast presents a grimmer picture because the net proceeds of the Term Facility is $258 million. This implies that the fees and perhaps the Original Issue Discount on the Term Facility is a ghastly $42 million, on $300 million! Even using the assumption that it will assume the VSLR Aggregation Facility, SUNE will still need to drawdown $244.9 million of available cash to plug the gap between the USES and SOURCES for the transaction.
The February 26th Shareholders Meeting date allows SUNE another 3 weeks to sell some or all of the VSLR residential solar portfolio to plug the gap but there is no guarantee that management will complete a sale in that time frame, including closing the deal and receiving the cash. Eagle eyed SA reader "saveyourgreen" spotted this article on the sale of SUNE's Japanese assets but there has been no press release or SEC filing about the transaction from SUNE. If the sale is occurring, there is no guarantee that this deal will close in time to help close the funding gap either. Look at the difficulty that SUNE has had in closing the Mount Signal deal under the $336 million debt restructuring announced on December 30, 2015.
Does SUNE need to complete another financing to plug the cash gap? SUNE should have sufficient liquidity as a result of the second lien financing based on its January 5th Business Update, but its underestimate or "under disclosure" of its cash needs to close the VSLR deal does not inspire confidence. In addition, the cash on hand forecasted for the end of the 4th quarter 2015 and the 1st quarter 2016 includes monies earmarked for capital expenditures on other projects. SUNE has not classified this cash as restricted but can it be drawn upon to help close the VSLR deal? It is impossible for me to reach a conclusion based on the disclosures provided by SUNE. Given the time remaining until the close of the Merger, the complexity of the SUNE corporate structure, the blowback from the second lien financing, and the apparently ghastly cost of the Term Facility, it may be difficult and costly to source additional financing. In addition, after the second lien financing, the Term Facility and the 313 Loan, there just may not be any juice left to squeeze out of the financial engineering lemon.
SUNE's attempts to complete the VSLR deal is akin to trying to slide an African elephant through the front door of my tiny childhood Cape Cod style home: it is going to be a really tight squeeze and if successful it will leave us asking if it was such a good idea in the first place.
If the Delaware Chancery Court is not convinced by the arguments for an enjoinder or rescission in the Appaloosa Case, the cash flow path forward is clearer.
|TERP Closes Purchase Agreement||(000s)|
|Employee Options, RSUs||$53,500|
|Equity for Term Borrower||$100,000|
|Escrow Acct TERP Purchase||$75,000|
|Repmt VSLR WC Facility||$50,000|
|Fees, Expenses @ Closing||$35,000|
|Fees, Discount on Term Fac||$42,000|
|VSLR Aggregation Facility||$-|
- Equity for Term Borrower: the Term Borrower is the corporate entity that will borrow under the Term Facility. Per the TERP Letter discussed on page 75 of the Definitive Proxy, SUNE will need to capitalize the Term Borrower with sufficient equity so that $100 million of cash will be on hand at close.
- Escrow Account Terp Purchase: Per page 7 of the Definitive Escrow Agreement.
- Terp Purchase: 470 MWs at $1700/Kw, per page 6 of the Definitive Proxy.
TERP's contractual obligation to purchase future VSLR residential solar assets, after the initial 527 MWs, terminates with the repayment of the Term Facility. By requiring an equity contribution to the Term Borrower, TERP is reducing the risk that SUNE will not repay the Term Facility within a year. This has the effect of increasing the cost of the Term Facility from ghastly to insane since only $158 million of the $300 million face value could actually be used to fund the transaction in the instance of TERP closing on its Purchase Agreement. Since the Funding Excess is $142.6 million, SUNE should avoid using the Term Facility if TERP is not enjoined from closing.
Conclusion: The financing of the VSLR deal is going to be very tight if TERP is enjoined from fulfilling its obligations under the Purchase Agreement. The market reaction to such a court decision could be violent. My next article will explore the various scenarios that may play out and will include a valuation of the 470 MWs of VSLR residential solar assets that SUNE is currently marketing to third party investors.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SUNE, TERP AND GLBL 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.