SolarCity Corp (SCTY) Becomes More Complex With Silevo Buy

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Wall Street has reacted very positively to SolarCity Corp (NASDAQ:SCTY)’s announcement that it will buy Silevo for $350 million. Analysts from multiple firms are weighing in, with some saying it’s definitely a positive and others saying they’re reserving judgment until SolarCity provides more details about the deal.

SolarCity adds complexity

In a report dated June 17, 2014, Raymond James analysts Pavel Molchanov and Ryan Berney say that while SolarCity Corp (NASDAQ:SCTY)’s Silevo acquisition adds advanced technology in solar modules, it also creates more complexity. The acquisition is the biggest in SolarCity’s history, and they think it’s one of the company’s “more unorthodox strategic moves.”

With the acquisition of Silevo, SolarCity Corp (NASDAQ:SCTY) is becoming more vertically integrated into the manufacturing part of the solar module value chain. The company will pay $200 million up front for the currently private Silevo, which includes the assumption of liabilities. SolarCity will add up to $150 million in earn-out provisions in the form of stock as well. This is the biggest use of SolarCity’s stock in the company’s history.

Silevo looks similar to SunPower

Although Silevo isn’t a well-known name, the Raymond James team said they’ve been talking with the private company “over the years.” They say the big attribute the company brings to SolarCity Corp (NASDAQ:SCTY) is its high conversion efficiency technology. The analysts say the closest comparison to Silevo in the public sector is SunPower Corporation (NASDAQ:SPWR),

Silevo’s cell efficiency level is currently at 21%, and the company has a medium-term target of 24%. They say this is comparable to that of SunPower Corporation (NASDAQ:SPWR) while also being quite a bit ahead of commodity modules, which are in the 17% to 18% range. Higher efficiency is a good thing because it means it takes fewer solar modules to generate the same amount of power.

The Raymond James analysts said the extent to which higher efficiency is valuable depends on where the solar system is located. They note that space is highly restricted on residential rooftops and even some commercial rooftops. However, space is usually less constrained for ground-mounted systems.

Analysts mixed on the SolarCity deal

Along with the announcement about the Silevo acquisition, SolarCity Corp (NASDAQ:SCTY) also said it is planning to build the very first large-scale manufacturing facility in New York. Silevo does already have a 32-megawatt facility in China, although the company won’t be able to scale until after the New York facility is built. That factory is expected to have a 1,000-megawatt capacity and cost between $350 million and $400 million to build

The Raymond James team said while most of Wall Street was excited about SolarCity Corp (NASDAQ:SCTY)’s news, their views are more mixed. They like Silevo’s technology and say it fits into SolarCity’s residential focus very well. However, they say SolarCity has increased its complexity by moving into module manufacturing. They believed that the company’s placement as the only big public solar downstream pure-play was its big differentiator, although it was probably just a matter of time before some of its competitors go public.

More capex details wanted

In a report dated June 17, 2014, JPMorgan analysts Paul Coster, Mark Strouse and Paul Chung note that the acquisition will enable SolarCity Corp (NASDAQ:SCTY) to cut costs in the long term by making itself more vertically integrated. Also using high-efficiency solar panels will reduce installation costs.

Currently SolarCity Corp (NASDAQ:SCTY) is estimating that capital expenditures for the Silevo acquisition and plant construction will be about 35 cents to 40 cents per watt for the first gigawatt of manufacturing capacity. Currently the company is seeking funding partners for the project. The JPMorgan team wants to see more information regarding capital expenditures, however, before they make any adjustments to their model. They do say though that SolarCity could see upside to its longer-term Retained Value estimates.

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