SunEdison Thirst for Yield Growth Drove $2.2 Billion Vivint Deal

When SunEdison Inc. created a separate business to buy and operate power plants, it may have underestimated the new company’s endless appetite.

That’s partly why SunEdison agreed to pay a 52 percent premium for Vivint Solar Inc., the No. 2 U.S. rooftop solar developer. The $2.2 billion deal on Monday will deliver 523 megawatts of existing capacity, which SunEdison will sell to its affiliate TerraForm Power Inc. That also will contribute to its expected 1.2 gigawatts of rooftop projects next year.

TerraForm will need it. The company’s business structure requires steady growth, a model that may be difficult to sustain, said Ben Kallo, an analyst at Robert W. Baird & Co. San Francisco. Keeping that beast well-fed means TerraForm will be able to continue increasing its dividend, pleasing investors. Failing to do so may leave investors losing interest.

SunEdison and TerraForm “will need to source larger and more frequent acquisitions,” Kallo said in an interview Tuesday. “They’re running at 20 percent plus growth. They have a lot of momentum investors that want to see it continue.”

TerraForm is structured as a so-called yieldco, a model that’s becoming increasingly common in the renewable energy industry.

Developers like SunEdison always need capital to build power plants, so they create a new, publicly traded unit to buy projects once they’re completed. The yieldco’s function is to collect revenue from selling electricity, helping fund the purchase of more power plants.

Growth Need

That constant growth also helps fuel dividend payouts that make yieldco shares attractive to investors. Buying more and more power plants drives up revenue and means there’s more cash available for distribution.

With the Vivint deal, TerraForm will boost its dividend 30 percent next year from its current 2015 guidance, to as much as $1.75 a share. In 2017 it expects the payout to increase to $2.05, and to $2.71 in 2019.

That performance is fueling demand for TerraForm shares, which have gained almost 40 percent since their initial public offering in July 2014.

SunEdison, which owns a controlling interest in TerraForm, is planning to expand its yieldco model with TerraForm Global Inc. That company, which is preparing to go public, will own and operate power plants outside the U.S., complementing the domestic focus of the first TerraForm.

Expansion Pressure

While that will help SunEdison continue to develop new power plants around the world, it will also create more pressure to expand two yieldco portfolios, said Kallo. He downgraded SunEdison shares Tuesday to the equivalent of hold while it digests its current acquisitions.

“Very soon they’ll need to be filling TerraForm Global with plants in emerging markets in addition to TerraForm Power,” Kallo said.

SunEdison is already moving on to the next expansion, announcing Tuesday the purchase of closely held Mark Group, a British rooftop solar developer. Terms weren’t disclosed.

Other yieldcos that have been less acquisitive haven’t been able to match TerraForm’s performance, which is fueled by SunEdison’s stream of deals.

NRG Yield Inc., formed by the biggest independent U.S. power producer NRG Energy Inc., and 8point3 Energy Partners LP, created by the U.S. panel makers First Solar Inc. and SunPower Corp., are focusing more on projects developed by their parent companies.

NRG Yield is down more than 10 percent since it began trading in July 2013, and 8point3 has slipped more than 16 percent since its IPO last month.

SunEdison Chief Executive Officer Ahmad Chatila plans to continue feeding its yieldcos, and he’s looking for big portfolios.

“We’re not going to do small deals,” Chatila said on a conference call Monday. “We do large deals because they take the same time, yet they are impactful to our shareholders.”

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