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TheStreet Open House

SunPower Gives Shareholders a Raw Deal: Analyst

NEW YORK ( TheStreet) -- Leave it to SunPower (SPWRA) to find more ways to make things look good on the surface when nothing's really changed for shareholders.

In case you were out last Friday doing some last minute shopping for holiday presents, SunPower was busy buying too. The company agreed to acquire Total's (TOT) solar power development company Tenesol for $168 million in cash.

Total and SunPower said all the right things in the press release.

"Our acquisition of Tenesol is another step toward differentiating ourselves in the competitive solar market," said Tom Werner, SunPower president and CEO.

Philippe Boisseau, president, Total Gas and Power Division, added: "Tenesol's well-established channels, manufacturing base and complementary global footprint will help expand SunPower's market reach and accelerate its share gain during market consolidation."

The most important fact to know about this deal, however, is that SunPower didn't have any choice but to acquire Tenesol -- this demand was spelled out in the original deal in which Total purchased 60% of SunPower's shares earlier this year.

In fact, at the time of the Total acquisition of a majority stake in SunPower, some analysts criticized the Tenesol aspect of the agreement, arguing that SunPower would end up overpaying for Tenesol. When the original Total deal was announced, analyst Mark Bachman, now at Avian Securities, immediately advised investors to subtract from the purchase price the amount they assumed SunPower would end up paying for Tenesol.

Edwin Mok, analyst at Needham & Co., has three reasons why the deal is a potentially bad one for SunPower shareholders.

Mok estimates the deal values Tenesol at 0.6x its 2011 sales, which he characterized as "somewhat pricy given where solar stocks are trading." The multiple is above SunPower's 2011 enterprise value/sales ratio of less than 0.5x. Tenesol expects sales of $261 million in 2011.

Even though SunPower is paying in cash for Tenesol, Mok says the deal is really a wash between SunPower and its majority owner. Total agreed to purchase 18.6 million shares of SunPower common stock in a private placement at $8.80 per share, a 50% premium to the Dec. 22 closing price of $5.85. However, Mok says the private placement could dilute existing shareholders by adding more shares of the company.

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