TerraForm Power shares started climbing again today following the release of a letter from activist investor David Tepper’s firm Appaloosa Management. The letter was released as part of a regulatory filing with the Securities and Exchange Commission which also indicates that Appaloosa has bumped up its stake in TerraForm from 9.25% to 9.5%.
Shares of TerraForm Power reached as high as $8.54 per share during regular trading hours before beginning to retreat and cut into that gain. Tepper’s not the only high-profile investor with a stake in the company. You may remember that David Einhorn’s Greenlight Capital continued to hold a stake in TerraForm during the third quarter, although Dan Loeb’s Third Point exited its position.
TerraForm Power getting too close to SunEdison?
The letter is from Appaloosa Senior Partner James Bolin and addresses TerraForm President and CEO Brian Wuebbels. He begins by saying that their stake in TerraForm demonstrates their belief that it can “regain its balance” but that they believe this can only happen with “independent leadership that is determined to honor the Company’s mandate … ‘to acquire, operate and own renewable energy generation assets serving utility and commercial customers that generate high-quality contracted cash flows.'”
Bolin expresses concern that TerraForm Power’s relationship with SunEdison (the company it serves as YieldCo for) will get too close through the planned shift in its business model, which includes the planned acquisition of Vivint Solar. This same concern has been raised by analysts from multiple firms as well.
Appaloosa recommends against Vivint Solar transaction
Appaloosa believes that the purchase agreement for Vivint might not be able to be legally enforced for several reasons. For example, the agreement is between a controlling parent company and a subsidiary, which the firm’s management believes would fall under the “entire fairness doctrine” rather than the “business judgement rule.” This would mean that it will be on the board of directors to provide proof that the deal is commercially fair for TerraForm Power and that the adoption procedures of the agreement were fair.
The letter goes on to suggest that the deal to acquire Vivint Solar isn’t fair to TerraForm because the effective purchase price was “high by market standards” as of July and remains high now at nearly $1.84 per watt, including the costs associated with the transactions. Appaloosa states that the deal only benefits SunEdison and not TerraForm and that SunEdison “clearly covets the Vivint development operations that it needs to offset defects in its own capabilities and market position,” which it has lost to competitors like SolarCity.
TerraForm left unprotected
According to the letter, Vivint’s rooftop assets are forced upon TerraForm and are “inferior” while coming at an “inflated price” for the purpose of subsidizing SunEdison’s costs in acquiring Vivint. Vivint focuses on the consumer rooftop solar business, which some analysts maintain is not as strong as the commercial or utility segments of the sector.
Bolin goes on to state that under the deal between SunEdison and Vivint Solar, TERP doesn’t get the normal protections extended to an unaffiliated buyer and seller because of the way the deal forces the assets onto it. As a result, he says TERP receives the burn of “specific performance provisions.
Also SunEdison and Vivint are not subject to many performance standards and could even fail to deliver the contracted assets as of the effective date under the terms of the current agreement. SunEdison could even issue an unsecured note to TerraForm “as a substitute for any deficiency,” a provision which Appaloosa believes will be invoked. Tepper’s firm thinks that SunEdison is in a “precarious financial position” and that TerraForm Power may never be able to collect on the note.
Today’s letter from Appaloosa marks the firm’s second letter in just a week’s time.