Major solar energy farms often involve acres of glass panels spread across a broad swath of desert. But industry M&A of late has focused on the vertical, not the horizontal, as solar cell producers seek closer ties with their utility customers.
Such vertical integration deals reduce risk by bringing producers into a sector that isn’t so heavily dependent on short-term swings in supply and demand.
Big solar players First Solar (FSLR), MEMC (WFR) and Sharp have all cut deals in recent months to buy project developers, which typically have energy generation capacity and utility supply contracts.
A First Solar employee holds a thin solar module at the company’s plant in Frankfurt, Germany. First Solar, MEMC, and Sharp have all cut deals in recent months to buy project developers, which typically have energy generation capacity and utility supply contracts.
Sharp last week closed a deal that will let it move beyond the highly competitive solar panel market. It paid $305 million for Recurrent Energy, which has contracts with Southern California Edison (EIX), the Ontario Power Authority and other utilities. It claims a project pipeline totaling 2 gigawatts.
The Sharp-Recurrent deal echoes solar panel maker First Solar’s April buy of project developer Next Light Renewable Power for roughly $285 million.
Late last year, MEMC, which makes silicon wafers used in solar panels, bought SunEdison, which claims a pipeline of 1.5 gigawatts.
“MEMC will now participate in the actual development of solar power plants and commercialization of clean energy, in addition to supplying the solar and semiconductor industries with our traditional silicon wafer products,” CEO Ahmad Chatila said at the time.
The deal gives MEMC an “internal project pipeline” it can offer to customers that build solar systems, says Stuart Bush, an analyst at RBC Capital Markets.
The entry of large, well-financed outfits augurs well for the build-out of solar generating capacity.
“It’s basically large companies placing bets on these markets developing,” said Greg Neichin, a vice president of Cleantech, a San Francisco research and advisory firm.
The growing presence of industry giants also mitigates credit concerns for solar projects.
Solar isn’t the only bright spot for renewable energy takeovers. The overall sector’s M&A activity last year was as brisk as it was at the general takeover top in 2007, according to Mergermarket. The London-based researcher found 228 deals with a total value of nearly 50 billion euros ($69 billion).
Alt-energy M&A activity was up nearly 55% in Q2 vs. a year earlier, says M&A advisory firm IMAP.
But not everyone is bullish on the sector’s M&A outlook.
“There are probably some good value opportunities, but I don’t see a big wave of M&A,” said Todd Allmendinger, a Charles River Associates vice president focused on renewables. “Some companies taking a longer view may be willing to position themselves now to take advantage of growth opportunities in the next two to five years. But some may be discouraged by the economic environment and continued regulatory uncertainty.”
Falling electricity and natural gas prices have made renewable sources somewhat less appealing, Allmendinger adds.
But alt-energy firms are ramping up R&D, much of it on technologies to reduce solar producers’ costs to make them more competitive with traditional power.
Venture, Buyout Firms
Such green-energy technologies have been funded by venture capital. Indeed, renewable energy has been gaining on information technology as the darling of Menlo Park, Calif., for years.
But developing new energy technology can be costly and often tries the patience of venture investors. With IPO markets still frosty, many promising alt-energy startups desperately need capital.
While potential sellers may abound, the ranks of buyers may be growing even faster.
Private equity has had trouble getting the credit it needs to swing profitable megadeals. But some buyout firms are using their huge cash war chests to pick up appealing smaller targets in renewable energy, says Sandeep Beotra, an investment banker at Morgan Joseph.
U.K. buyout firm Terra Firma recently shelled out 50 million euros ($69.5 million) for Italian solar power developer Rete Rinnovabile.
Private equity is also emerging as an active investor in late-stage venture-backed firms.
In Europe, utilities have been big buyers of renewable energy assets. Thus far, U.S. utilities have not been major buyers but they “will get more active in buying bigger assets,” Beotra predicted.
Asia Could Become A Buyer
Finally, the cash-rich Chinese lurk in the wings. Chinese banks have been throwing cash and credit at the domestic solar industry.
“Chinese state-run banks have lent north of $36 billion to Chinese solar companies,” Bush said. “Their access to low-cost capital is giving them a huge advantage.”
If applied to buyouts, it will also begin to push up prices.
Large Korean companies like Samsung could also emerge as buyers, Allmendinger says.
But what will really raise the value of alt-energy assets is further progress in reducing costs.
“The holy grail for this industry,” said Beotra, “is to stand on its own two feet and gain parity — meaning it can produce electricity at the same cost as traditional sources.”
