SunEdison, TerraForm Surge on First Wind Deal: What Wall Street's Saying

NEW YORK (TheStreet) -Shares of SunEdison (SUNE) and its subsidiary TerraForm Power (TERP) surged on Tuesday as investors applauded the companies plan to acquire wind energy operator First Wind for $2.4 billion.

The acquisition is expected to be immediately accretive to TerraForm once the deal closes in early 2015. With the purchase, SunEdison acquires the "leading independent wind development and asset management company and becomes the leading global renewable energy development company," according to a press release.

With the deal, SunEdison will purchase over 1.6 gigawatt (GW) of pipeline and backlog projects, which have been added to TerraForm Power's call right project list. The projects are expected to be operational in between 2016 and 2017. The transaction also adds an additional 6.4 GW of project development opportunities, the release said. SunEdison raised its 2015 project installation guidance from 1.6-1.8 GW to 2.1-2.3 GW, it said in the release.

SunEdison shares were surging 25.4% to $20.82. TerraForm's stock also rose 28.2% to $33.15. Here's what analysts had to say.

Josh Baribeau, Canaccord Genuity (Buy; $30 PT)

Though this comes a bit earlier than we anticipated, we have long expected both companies to eventually diversify out of solar. We do not really view this as a shift in business model, as the company's major objective still remains to acquire and develop cash flow-producing energy assets. This transaction is fully aligned with our positive investment thesis that the companies will accelerate organic and inorganic opportunities beyond investor expectations. SunEdison raised its installation guidance and Terraform raised its CAFD and dividend guidance strongly.

We continue to like the solar macro globally, despite some recent policy risks and what we believe are temporary declines in traditional energy prices; however, wind and potentially other renewables help SunEdison expand its total addressable market and hedge against solar's cyclicality.


Stephen Byrd, Morgan Stanley (Overweight)

What we liked: Management is using its valuable currency to roll-up the fragmented development industry, and driving DPS growth significantly ahead of expectations: cons. 2015 DPS est. was $1.18, compared to new guidance of $1.30. As part of the transaction, SUNE successfully secured $1.5Bn of nonrecourse capital to fund new development projects, which provides more comfort around sources of financing for development projects. Lastly, wind assets provide an important element of diversification for the business in terms of geography, as well as exposure to wind technology to reduce concentration in solar.

What we didn't like: Management expects cash-on-cash returns of ~9%, which seems reasonable in the current wind M&A environment, but is not as high as we are modeling for run-rate new project economics. We continue to expect future projects to achieve double-digit IRRs based on SunEdison's strong incentive to grow DPS as quickly as possible to accelerate IDR splits in the coming years.

Overall we think the acquisition is an incremental positive, and demonstrates the value of the company's devco/opco architecture and declining cost of capital. This acquisition could mark the first in a series of such large-scale M&A that provide incremental fuel to an already robust growth outlook. As published previously, we forecast DPS CAGR at TERP of 24% through 2018.

Patrick Jobin, Credit Suisse (Outperform, $34 PT)

After markets closed Monday, SunEdison and TerraForm Power announced they have signed a definitive agreement to acquire First Wind. The acquisition expands SUNE's renewable development capabilities beyond solar into wind, provides accretive cash flow additions to TERP (and likely CF accretive to SUNE, in our view) and accelerates the time for SUNE to receive cash flows under the IDRs by approximately a year. The company will provide more details Tuesday morning (8am ET, 612-332-1025). Given the attractive unlevered yield on cash flows implied by the acquisition (8.4%), massive pipeline expansion (+8 GWs), and business model diversification, we reiterate our Outperform rating and $34 Price Target, reflecting 105% potential upside from today's closing price.

Krish Sankar, Bank of America Merrill Lynch (Buy, $28 PT)

In our view, the headline positives are a substantial increase in SUNE's pipeline and longer-term development opportunity set, a near term increase in limited partnership distributions, and accelerated IDR recognition. The transaction itself is complicated. As part of SunEdison's $1B upfront payment, it will issue a $340M sellers note. The entire transaction is supported by bridge financing, and SunEdison plans to put in place a $1.5B non-recourse financing facility for projects expected to drop to Terraform.

TheStreet Ratings team rates SUNEDISON INC as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:

"We rate SUNEDISON INC (SUNE) a SELL. This is driven by some concerns, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, generally high debt management risk, disappointing return on equity, weak operating cash flow and poor profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Semiconductors & Semiconductor Equipment industry. The net income has significantly decreased by 156.7% when compared to the same quarter one year ago, falling from -$110.40 million to -$283.40 million.
  • The debt-to-equity ratio is very high at 16.45 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. To add to this, SUNE has a quick ratio of 0.53, this demonstrates the lack of ability of the company to cover short-term liquidity needs.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Semiconductors & Semiconductor Equipment industry and the overall market, SUNEDISON INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • Net operating cash flow has significantly decreased to -$276.30 million or 169.29% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
  • The gross profit margin for SUNEDISON INC is currently lower than what is desirable, coming in at 25.69%. Regardless of SUNE's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, SUNE's net profit margin of -41.60% significantly underperformed when compared to the industry average.

-Written by Laurie Kulikowski in New York.

Follow @LKulikowski

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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