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First Solar Takeover Chatter Is Overdone

Of course, the fact that CNBC didn't bother to ask Maxim's Chew to elaborate on his First Solar report didn't stop CNBC from adding to the inane chatter about First Solar on Thursday afternoon, highlighting a quote from Chew's report after the close [by the way <i>CNBC</i>, his name is Aaron, not Andrew]. First Solar shares rose 3.5% on Thursday, while the markets tanked, something that "tipped off" CNBC to the impending deal. One might also want to consider that First Solar spiked all of 3.5% to $45.61, bringing its year-to-date decline to an even 65%. There was also a report out on Wednesday that First Solar might be in the running for a deal to supply panels to SolarHybrid, which is building solar projects out west and recently decided to ditch solar thermal power for photovoltaics. Maybe it's good news for First Solar, if it doesn't have to sell the panels at a loss.

As for GE acquiring First Solar, here are a few point and counter-points to consider:

Chew made all of the logical points in favor of a First Solar deal in his report, though he didn't intend it to imply a deal is likely:
  • Prospects more likely at $5 billion market cap today than $15+ billion in 2010
  • GE's entry into First Solar's cadmium telluride solar module market production merges interests
  • Low cost of capital for a GE offers incomparable strategic advantage to FSLR's project business
  • FSLR likely more willing seller after turbulent year, including the ousting of its CEO, and the return of former CEO Michael Ahearn as interim CEO who has no "skin in the game," having already unloaded his entire insider stake in First Solar to the tune of a personal fortune in the range of $500 million

Now here's the counter-point argument:
  • Why would a company known to be arrogant (maybe that's overstating it, a little) accept a deal based on its current $45 share price when just months ago it was $180 and why would GE buy at $50 knowing that Total(TOT) bought SunPower(SPWRA) at $23.35 and shortly thereafter open market shares of SunPower were trading at $6 as the solar sector fundamentals worsened, especially since the market upheaval is not yet finished? In fact, some solar analysts believe when all is said and done and the shakeout in solar finished, First Solar shares could be worth much less than they are now.
  • I've a few times heard the quip, "GE likes to buy companies out of bankruptcy" so why not wait even longer, even if it is interested?
  • With GE investing in Primestar, why not just take First Solar down in competition beginning in 2014 as opposed to buying now when the market is a mess? It seems that GE's timed introduction for 2014 allows it by happy coincidence to avoid the massacre of today's market.
  • The low cost of capital makes sense, as well as access to GE's global footprint where it is one of the dominant nat gas turbine sellers, and that's the SPWRA story with Total, isn't it? But is FSLR as bad off as SPWRA and really has to make a deal and see its once momo shares of $180 sold at $50?

One thing is certain: The situation in solar is pretty dire, and it may have reached its dire tipping point this week when Wells Fargo analyst Sam Dubinsky put out a note on LDK Solar (LDK) dropping coverage because he was no longer sure it "was a viable investment." In an era of solar bankruptcy and rampant manufacturing overcapacity, more deals are coming.

A person involved in the sale of PrimeStar to GE told TheStreet that he did think the PrimeStar acquisition by GE and its evolving plans in solar did make it more likely to consider a First Solar acquisition, as opposed to precluding a deal. But the official involved in the PrimeStar deal also noted that GE is entering the solar business for the long term, and has infinite patience, and also seeks maximum return on capital for shareholders.

"There are lots of opportunities for GE to generate a return on capital for shareholders, and they will be a big player for decades to come in solar with or without First Solar," the official said.

The bottom line was provided from Maxim Group's Chew himself: "This could be one of the most un-insightful reports I have ever written and yet it gets more play than any other. I was targeting this for the bears just to alert them to the fact that it's more doable now than in the past, so don't get caught." And here's the big difference from the past to now, courtesy of Chew: "I used to say 'it's hogwash' and now I say 'yeah, it could happen.' I wouldn't have written a note if there wasn't some logic to it."

Some logic -- logic that's been really overplayed at this point.

-- Written by Eric Rosenbaum in New York.

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