In Bankruptcy Era, Solar Innovation Goes on Auction

(Solar auction market story, updated for Evergreen Solar sale date, and to correct name of Hilco Industrial).NEW YORK (TheStreet) -- Ross Dove's family has been in the business of finding a home for bankrupt companies dating back to the Great Depression. In fact, it was the bankruptcy of a car dealership owned by Dove's grandfather that led the family into the auction business in the first place. Dove's grandfather owned an Auburn Cord (an early competitor to GM and Ford) car dealership, and when Auburn Cord went bankrupt (Depression-era buyers couldn't afford the cars) the car dealership of Dove's grandfather went bankrupt, too.

"It was around the end of the Great Depression. They brought in an auctioneer. Since my grandfather was out of work, the auctioneer hired him to help auction the dealership and my grandfather said, 'This is not such a bad business,'" as Dove recalls.
Robert Levy, Hilco Industrial managing partner, calling another auction

It's a long way from cars that competed with the Model T to solar panels, but today, Dove, managing partner of global auction and advisory firm Heritage Global Partners, finds himself one of the major players in a cottage industry: the bankruptcy auction of solar companies.

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The solar sector has bottomed out. Companies are scaling back manufacturing plants, if not shutting them down, and in some cases entering liquidation. Investors agonize over solar stocks that that have gone from being bought with two kinds of green dreams to leaving a green, nauseous feeling. Yet one niche within the solar sector is thriving: Dove and his main peer and rival Robert Levy, of Hilco Industrial, expect in the coming months a pipeline of at least a dozen solar restructurings to hit the auction circuit.

Solar Scavengers
"I'm kind of like a market maker in this sector, and it's a good time to be an auctioneer," Dove says. In fact, the old joke about the funeral business never having a bad year could apply to the corporate bankruptcy auctioneers. There task here, though, is uncharted territory. Dove says the auction business most recently cycled out of a mega-auto industry restructuring period, and given his grandfather's history, that was in keeping with the the typical death certificates signed for American industry. With solar now in the court of the corporate bankruptcy auctioneers, though, a new approach to revaluing companies needs to be devised as innovation meets its undertaker.

Says Hilco's Levy, "When there is rush to invest, think of the internet back in 2000, there will be mistakes and overcapacity and those who invest a significant amount of money in capital and resources into good and bad ideas. Some people do a little of both."

In March 2010, BP Solar announced that it was shuttering its U.S. plant located in Maryland. In retrospect, BP's ( BP) move was the canary in the coal mine, and it took a year-and-a-half from that event to the trio of bankruptcies that put solar bankruptcies on the map in a big way. Dove was involved in the BP auction.

Spectrawatt, a small Intel ( INTC)-funded solar manufacturer had its equipment auctioned off to China's Canadian Solar ( CSIQ) last month, an auction handled by Dove.

Evergreen Solar, which manufactured an innovative solar wafer and was given generous incentives by the state of Massachusetts, abandoned its state-of-the-art Devens, Mass.-based plant last year and moved to China in an attempt to resurrect its manufacturing process for the low-cost, cookie cutter solar product demands of the times, and avoid bankruptcy. Evergreen went bankrupt in August anyway.

Evergreen Solar's auction is being handled by Robert Levy's Hilco Industrial, though the process ran into a wrinkle recently when the Department of Energy made a challenge to the auctioning off intellectual property it claims part ownership in -- especially if the auction buyer is Chinese, one would assume. Levy said a sale of assets in Evergreen's Devens, Mass. and Midland, Mich-based plants will be conducted on Dec. 13 in a piecemeal fashion.

And this is just the beginning. Energy Conversion Devices ( ENER) has been on bankruptcy watch for as long as Evergreen was -- at least as far back as early 2010 -- and privately held solar companies are also expected to take assets to the auction block, such as Calisolar, which recently shut down its U.S.-based solar cell plant in California, but now plans to focus on a polysilicon plant in Mississippi.
Beacon Power, whose flywheel technology is pictured here, was a recipient of a federal loan guarantee. It announced its bankruptcy on Monday, Oct. 31.

Even the cream of the solar crop are currently under pressure. First Solar ( FSLR) fired its CEO last week and said it will cut capital spending, and Wall Street for the first time is worried about the once-pristine balance sheet of the country's biggest solar company. While its just reported third-quarter cash flow was better than expected, its full-year cash flow forecast was to at best break even, and possibly end the year in negative cash flow territory.

And of course, there is the failure of federally funded Solyndra. This past Monday, a second U.S. green energy company to receive a federal loan guarantee, Beacon Power, entered bankruptcy.

If there was a rush to invest in innovations in the green energy sector when they were defined by their promise, will there be a rush to invest in the innovation when it is positioned on the auction block?

Dove's auction of Spectrawatt was a bulk asset sale, with Chinese solar company Canadian Solar paying $4.9 million for Spectrawatt's tangible assets. Not one buyer stepped up willing to assign an enterprise value to Spectrawatt.

The three highest Spectrawatt bidders were all what is referred to as tool buyers. They were offered the opportunity to bid on "lot 1" -- call it the innovation lot -- which included the technology and ability to operate in Spectrawatt's existing premises and receive design help, but bidders were only interested in the tangible assets.

"The buyers didn't ask for the schematics or engineering or management support," Dove says.

Welcome to Darwin's theory of natural selection as it applies to technology innovation. "I did this in the computer industry and there is a belief in the Darwinian last man standing," Dove says. He explained that even if many of the major companies in the solar sector are cutting back on capacity due to this year's demand lull, there is a belief that as mass consolidation occurs the long-term winners will have the capacity to turn the corner on profits. In other words, if it's cheap enough then there's reason to buy in bulk, planning for a better day.

As solar companies hit the auction block, though, the market of buyers interested in more than spare parts is ruled by fear, and given failures like Solyndra -- the biggest venture capital loss ever, aside from the government's $528 million investment -- the big money remains on the sidelines.

"People who want to buy companies are waiting to see how it shakes out. Assets are selling primarily at a loss right now as there is no compelling rush for enterprise buyers. It's not like they are buying a stream of income," Dove says.

Dove initially went out to the market with Spectrawatt expecting major energy and semiconductor companies to be interested, but found no interest. "We didn't get a single semiconductor company to bid on Spectrawatt, even though the original investor was Intel. We didn't get a petroleum company interested even though BP was in the solar business. Maybe Spectrawatt just wasn't the right opportunity," Dove allows.
Solyndra's manufacturing plant and "cutting edge" tubular solar technology, which some Solyndra employees are still stunned couldn't survive given its innovative approach to harnessing the sun's energy.

The Spectrawatt sale experience isn't necessarily going to be the rule for valuation, or lack thereof, in failed solar innovation, though.

Dove's peer and rival Robert Levy at Hilco says he and Dove differ on the approach to solar auctions, specifically in the cases of Spectrawatt and Evergreen, and that may make all the difference in turning a fearful buyer on the sidelines into an entrepreneurial gambler.

Selling Spectrawatt as a turnkey company was an afterthought for Dove, in Levy's estimation, whereas his Hilco Industrial has actually been trying to find a turnkey buyer for Evergreen from before the company even declared bankruptcy. While the two competitors have a long history together -- Levy sold an auction firm he owned to Dove before joining Hilco -- the gamesmanship is on display in Levy's comments. "We were hired by Evergreen because our fundamental process starts with finding a buyer who understands value. Ross sold Spectrawatt in less than a month. We've been working on Evergreen for six months and you won't get large companies to move that quickly without them doing due diligence," Levy says.

Moving quickly can result in some M&A values that receive smirks, too. French energy giant Total ( TOT) bought 60% of debt-laden U.S. solar company SunPower ( SPWRA) earlier this year, offering $23.25 for shares that were trading at $16, roughly a 40% premium. As the situation in the solar sector has worsened, the SunPower shares not owned by Total fell as low as $6.60, though they were back up to $10 this week.

Levy has belief that Evergreen, which spent $435 million to develop its solar manufacturing facility, won't be viewed as a scrap heap. "This is a state of the art facility that can be tweaked and optimized, and if you want to build one, it's $450 million plus time," Levy says.

Why would a buyer see huge value in the Evergreen Solar's Devens, Mass. plant when the company itself decided to move to China in a last gasp effort to save itself in the year before its bankruptcy?

Levy has two answers. He believes that there are companies for whom having a U.S.-produced product is still important. Secondly, seven solar companies recently petitioned the U.S. government to place a 100% tariff on solar products made in China, citing unfair trade practices in the world's dominant solar market. Though the interview with Levy was conducted before the solar trade case was released, he also cited this line of reasoning, saying that incentives to manufacture in the U.S. could be an important component of the solar market in the future.
The U.S. solar industry is at a crossroads, as evidenced in the recent firing of the CEO of First Solar, the largest U.S. solar company and a member of the S&P 500.

Evergreen didn't have the cost structure to operate in the current price free fall environment -- neither did Solyndra -- but Levy says that since it began the process of looking for a buyer, the solar company's cost per watt dropped from $2.20 to $1.80/watt and has found areas where enhancements could drop costs to 1.20/watt over a 6 months period. "There are entrepreneurs who like to take calculated risks and in many industries we see ups and downs in cost and costs will continue to drop but not down to zero," Levy says.

Even in Levy's more optimistic assessment, it ultimately comes back to cutthroat bottom line logic. "People snap up low cost opportunities. They snap up expensive goods at a low value and sit on it until the tide comes back," Levy says.

Indeed, it's fitting that as the lords of the corporate bankruptcy auction find themselves getting up to speed on solar technology, their view of the bankruptcy sales process reflects both the highs and lows in the rhetoric of the green energy industry.

Dove's Spectrawatt auction was a fire sale with equipment shelved away by a would-be long-term survivor on a future low-cost landscape. Levy believes that Evergreen Solar's state of the art manufacturing plant and process won't be reduced to a penny-on-the-dollar scrap heap. And within these two pioneering solar bankruptcies and auction processes both the peril and promise of innovation is on display.

When the bidding process starts it's not at all clear whether it will conclude in a company's eventual rebirth -- or maybe, like Spectrawatt, the company's gutting, reducing it to anonymous cogs within a commodity manufacturing process of a rival nation's industry.

Where does this leave Solyndra and the $528 million for which taxpayers remain on the hook?

Levy says there are billions of dollars in solar about to go on auction. He notes that of the $435 million spent by Evergreen Solar putting up a facility, 60% was machinery and equipment. "Forget about the $535 million loan Solyndra exhausted all by $7 million left on the loan from the government," Levy says. "How much did it cost total to put the Solyndra plant up? The market cap of every one of the companies in the solar sector has dropped 65% to 75% in the last 60 days. I don't necessarily believe market cap and stock price correlate to business. There's lots of money out there that will change hands."

Even in the case of innovate processes, a significant portion of a tech plant may be co-opted for other processes. "If you have a $500,000 panel washer and it's German made and every solar plant in the world can use it, and you can buy it at 20 cents on the dollar, then someone will buy it," Dove adds. Dove is handling part of the sale of Solyndra items, a sale detailed in The New York Times earlier this week, but the "bargain hunting" focused on in this profile isn't the real story for those interested in the evolution of the green energy industry, or the $528 million in taxpayer money extended to Solyndra.
President Obama during the now-infamous Solyndra photo-op.

As innovation goes on auction, the real issue is the value of an innovative process like Solyndra's solar technology, and not a nuts and bolts panel washer used by every solar company and made in Bavaria. "In my personal opinion, someone will pay for the intangibles of Solyndra," Dove says.

"I just offered a company that had patented a golf putter, completely low grade compared to solar, and someone paid a premium for the technology on the golf putter," Dove remarks.

Dove notes that Solyndra has a "world class" piece of real estate in its headquarters that did not disappear because the company went bankrupt. The office space and production plant is of the caliber of any leading U.S. technology firm, in the auctioneer's estimation, and as detailed in the Times report, bidders got a look at it this week.

One never knows what will fetch value in bankruptcy. Corporate death brings out the kitsch collector as well as the shrewd corporate vulture looking to pick apart its prey.

"We sold the big 'E' in front of Enron headquarters. Just the big 'E' and got a lot of money for it," Dove says. He couldn't remember the exact value, but said the metal sculpted 'E' fetched somewhere between $40,000 and $50,000, and was sold to a big computer dealer who wanted it in his showroom as a sales gimmick.

"People find a way to monetize anything. If they wanted to sell the name Solyndra, I believe there would be a price. Somebody would bid on the name just because of all the news," Dove surmises. Indeed, it's amusing to imagine the Republican National Committee using Solyndra headquarters as a backdrop for 2012 presidential election season commercials.

Going once?

-- Written by Eric Rosenbaum from New York.

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