SunEdison shares declined for another day although shares of acquisition target Vivint Solar rallied today. Many shareholders are opposing the acquisition, so there are now questions about whether it will close at all. Fears about whether Sunedison Inc (SUNE) has adequate liquidity are mounting as a hearing on the lawsuit filed by Appaloosa has been set for next month.
Why liquidity concerns are increasing
The deal to acquire Vivint Solar has been nothing but trouble for SunEdison as it has raised the ire of shareholders who are angry because it loads too much liability onto its yieldco Terraform Power. Analysts from multiple firms have sided with the shareholders in saying that it’s just a bad deal.
In a report dated. Jan. 19 Credit Suisse analyst Patrick Jobin and his team explained that there are several reasons liquidity is a problem for SunEdison in light of the transaction. For example, cost of capital on residential assets is higher after SolarCity financed at a weighted yield of 5.8%, they noted. Also the rescheduling of the hearing in the Appaloosa case has ratcheted up the pressure on the company, creating concerns about what will happen if the company is forced to complete the Vivint deal without Terraform purchasing the operating assets.
Appaloosa seeks to block SunEdison’s acquisition of Vivint Solar
On Tuesday, the Delaware Court of Chancery canceled the hearing on the Appaloosa case that had been scheduled for that day and rescheduled it for Feb. 16. The court also consolidated the case with another one brought by the Central Laborers’ Pension Fund.
Jobin and team speculated on what would happen if the court issued an injunction against the Vivint Solar acquisition but it closes anyway. They said that if the attempt to block it is successful and Terraform Power’s take-or-pay agreement and if SunEdison still somehow is obligated to complete it, its liquidity would be under extreme pressure.
For one reason, they say the solar company wouldn’t be able to get the $300 million secured term loan because the take-or-pay agreement supported it. Also SunEdison would have to inject between $300 million and $560 million in extra equity to complete it. The company would still have between $570 million and $820 million in available cash, but it would still be positive by between $200 million and $450 million at the low point in the third quarter of 2016.
How SunEdison might be able to manage
To solve the problem, the Credit Suisse team said SunEdison could sell the rest of the operating assets for $1.70 per watt or about $799 million plus fees. This would reflect an unlevered IRR of about 6.2%. They think this is possible based on similar assumptions made by SolarCity as well, but they do see a problem in monetizing the residual part of it after the 20-year contracts.
The reason is because the majority of private equity firms hesitate to underwrite residual value. Further, they said if SunEdison does have to monetize just the contracted portion at about 8%, it would take another $108 million loss in the transaction. This would support the argument set forth by Appaloosa, which said that the original price wasn’t fair to Terraform. The Credit Suisse analysts remind investors also that there isn’t an easy way for SunEdison to break the deal with Vivint Solar, even if the deal is restructured.
Shares of SunEdison slipped by as much as 3.65% to $2.38 per share today while Vivint Solar climbed by as much as 10.78% to $8.63 per share. Interestingly, the Credit Suisse team has an Outperform rating and $19 per share price target on SunEdison. They’re not the only ones with a positive view on the company though as it received two upgrades earlier this month.