The story of SunEdison (SUNE) in the last several months has been nothing short of spectacular. We can be certain Harvard and other business schools will be doing case studies of this unique situation for many years to come.
Unfortunately, for longs, rarely does a week go by before the Company is in the news for yet another spectacular blow up. This last week was one such week with the twin dramas of the Appaloosa litigation and the termination of a 150MW deal in Hawaii. These developments have yet again shown the vulnerability of the Company and make many question its prospects.
While shorts continue to scream bankruptcy and longs throw up their hands in frustration, the story of SunEdison continues to be one that is full of complexities rarely seen by investors. While controversies continue to swirl and much remains unknown due to the lack of much public discourse from management, the SunEdison story today boils down to the following scenarios.
As far as the current Appaloosa lawsuit goes, the biggest concern raised by naysayers is that SUNE will go bankrupt if Appaloosa is granted an injunction. We see this argument as patently flawed if one understands the process of how an injunction is granted. Among other things, to grant an injunction, the judge has to believe that:
- Appaloosa is likely to win the case: We are highly skeptical that Appaloosa, having purchased TerraForm Power's (NASDAQ:TERP) stock after the Vivint Solar (NYSE:VSLR) acquisition was announced, has much of a case here. There is considerable evidence to indicate TerraForm actively supported, and may even have initiated, the merger transaction prior to the implosion. If a smoking gun were to be found to the effect that some decisions were forced on TERP, this would still not be an easy case for Tepper to win as the evidence would have to be weighed in the context of the overall deal dynamics and the disclosures in the TerraForm S-1.
- Appaloosa faces an irreparable damage if the merger is allowed to go through: This is certainly not true as there are many ways in which the court could have SunEdison compensate TerraForm Power at a later date if Appaloosa wins the case.
- The balance of harms favors Appaloosa: This, we believe is the most damning counterargument for anyone pushing the theory that SunEdison will go bankrupt if the injunction is granted. If this is the case, we would expect the judge to not grant the injunction as the balance of harms clearly does not support granting an injunction.
In simple words, an injunction here is not likely. Furthermore, it is certainly not likely if the judge has a reason to believe that SUNE will go bankrupt if an injunction is granted. The more interesting and likely scenario is what happens if Appaloosa does not get an injunction?
In this context, we believe the game has changed substantially since the Vivint deal was renegotiated in December. Several key developments that affect the deal now compared to December include:
- Residential solar market has tanked further, making the Vivint assets even less valuable. Several adverse net metering decisions have come into play, causing the size of the market to shrink. Concurrently, the cost of capital and the discount rates used for the assets have gone up.
- Due to the changes in the landscape, Vivint's 2016/17 prospects, if they were to be revisited, would be worse than what they were at the time of the revised deal.
- Residential solar valuations have plummeted. As a point of reference, the stock price of SolarCity (NASDAQ:SCTY), Vivint Solar's nearest competitor, has dropped by about 50% since the revised deal between SunEdison and Vivint was signed. Sunrun (NASDAQ:RUN), a company that is closer to Vivint in size, has also not fared well during this time. As yet another point of reference, the price of SolarCity has fallen by 66% since the original Vivint deal was announced. Since SolarCity is an industry leader and in a much stronger competitive position, one could argue that VSLR would have fared much worse had it remained independent.
- SunEdison had an abysmal capital raise which has substantially impacted the Company's capital structure as well as its ability to raise cash in the future.
- SUNE's prospects and cash situation have been hurt by the recent project cancellation setbacks in Hawaii.
- Its cash position has become worse due to the restructuring of its polysilicon and wafer operations.
- SunEdison's stock has fallen precipitously and the Company's current market cap at $450M is only a fraction of the Vivint deal, which also means that VSLR may not have much to go after if its deal with SunEdison falls through and if it has to pursue the legal route. It is also likely to be last in the line of claimants to get any meaningful return from the claim.
Due to these developments, it no longer makes sense for SunEdison to be proceeding with the Vivint Solar merger based on the current terms. The information available from the Appaloosa lawsuit also implies that SUNE is renegotiating the deal with Vivint and is hampered by the injunction proceedings.
Given the available information, we believe it makes eminent sense for the Vivint deal to be revised and that the deal is currently being renegotiated. We see two possible scenarios from these renegotiations.
- The deal will proceed albeit with modified terms: The challenge under this scenario is that neither of the companies has much time to go through major revisions. Especially any changes that affect the public shareholders will cause long delays and are likely to be ruled out. Under this scenario, it would be difficult to change the valuation significantly, and most of the changes would have to be in credit terms and how the assets are carried. The negotiating space in this scenario is limited.
- The deal will be terminated with substantial concessions from all involved: In this scenario, there is considerable scope to rearrange the deal for an exit. Fellow contributor Morningside Park expounded on one such possibility but many other options exist. The core of any such transaction would likely include the following terms:
- Substantial breakup fees from SunEdison in the form of cash, stock and debt.
- Monetization of Vivint's operating assets, possibly in the form of TerraForm Power's purchase (assuming no injunction).
- A lowered price assessment of VSLR's portfolio to better reflect the term sheets that SunEdison may have witnessed in the market.
- An option for Vivint to absorb SunEdison's residential and small commercial business so that it can gain scale and reduce per-watt operating overhead (or SUNE may discontinue that business altogether).
These are very difficult negotiations, and there are certainly no winners. Instead of a win/win, each party will be negotiating to minimize their losses. However, there is a substantial shared interest from all parties involved to salvage something out of this deal.
Given there are no winners without a negotiated solution, we do not believe there is much scope for SunEdison's bankruptcy. We believe it is highly likely that one of the above scenarios plays out and SUNE will survive and emerge as a smaller project developer.
In the highly unlikely case that an injunction is granted, we believe that there will be many grounds for Blackstone and SunEdison to renegotiate the deal to make the deal work for both parties. The negotiations under an injunction would be substantially similar to the scenarios discussed above except that TerraForm Power would not be a participant. Such a situation would further increase the pressure on Blackstone to find a negotiated solution with SunEdison.
In summary, we find an injunction unlikely. And regardless of whether it is granted or not, the motivation for the parties to negotiate and settle is tremendous. While we have long advocated SunEdison terminate the Vivint deal in spite of the costs, given the Company's current valuation, even an absorption of Vivint at reduced valuation would be a welcome development compared to the ongoing uncertainty. Any reasonable settlement would remove the cloud around SunEdison and make the Company a stronger entity.
Note: Author is not an attorney, and this is not a legal opinion.
Disclosure: I am/we are long SUNE, TERP.
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.