Vivint Scraps SunEdison Deal That Burst the Yieldco Market

  • SunEdison failed to close $1.9 billion merger in time: Vivint
  • Investors `reluctant to put more capital into the sector'

Vivint Solar Inc., a rooftop panel installer, scrapped plans to be bought for $1.9 billion by SunEdison Inc., which bid for Vivint in July to feed its growth strategy.

SunEdison, the world’s biggest developer of clean-energy projects, failed to meet obligations that would have finished the transaction, Vivint said in a statement Tuesday. The deal was delayed, renegotiated and challenged in court, and SunEdison had said it expected to close before the end of this month.

For SunEdison, the Vivint deal marked the start of a tumultuous chapter that saw SunEdison’s shares plunge more than 90 percent as investors began questioning its finances and business model. The day the purchase was announced, July 20, was also when the party ended for the financial trend that was supposed to transform the renewables sector: yieldco mania.

“It was the new thing, yieldcos; investors went crazy,” said Karen Morgan, chief executive officer at Renewable Energy Trust Capital Inc., which last year put off plans to form one of these publicly traded holding companies. The Vivint announcement made the market “pull back the covers and say, ‘Oh my God, this isn’t working.’”

Clean-power developers created yieldcos to buy up their and others’ wind and solar farms. The holding companies would raise cheap financing in the public markets and deliver dividends to shareholders, an appealing offer in an extended period of low-interest rates. SunEdison formed two of them.

Vivint fell 6.9 percent to $4.85 before the start of regular trading in New York. SunEdison rose 34 percent to $2.55.

“SunEdison’s failure to consummate the merger when required pursuant to the terms of the merger agreement constitutes a willful breach of the merger agreement, and Vivint Solar intends to seek all legal remedies available to it in respect of such willful breach,” Vivint said in the statement.

SunEdison spokesman Ben Harborne didn’t immediately return a phone call seeking comment Tuesday.

The model follows a straightforward logic: wind and solar farms generate steady revenue from selling electricity, helping fund dividends. As yieldcos buy more assets, revenue -- and thus dividends -- will grow. By November, yieldcos controlled 15 gigawatts of power-producing assets worth more than $35 billion.

Investors liked that story, right until SunEdison announced it would pay a 52 percent premium for Vivint, a rooftop-solar company that sells power to homeowners, rather than the investment-grade utilities that underpinned past deals. As part of the deal, one of SunEdison’s yieldco units, TerraForm Power Inc., agreed to buy some of Vivint’s operational assets. Suddenly, yieldcos were no longer viewed as safe bets.

“There were a lot of questions about valuation, cash flow yields and growth metrics,” said Carl Weatherley-White, who until recently was president of Lightbeam Electric Co., which filed in April to sell shares in an initial public offering and become a yieldco. “The industry stepped back at that point.” The company withdrew its registration in December.

Raising Money

Yieldcos and their parent companies raised at least $8.9 billion in the public markets in the first seven months of 2015, and about $1.5 billion in the seven months since, according to Bloomberg New Energy Finance. When the money spigot tightened, some yieldcos cut growth projections and suspended plans to sell more shares, in some cases until 2017. They slowed their buying binge after SunEdison and TerraForm, which together had clinched billions of dollars of wind and solar assets globally in the first half of 2015, announced the Vivint deal.

SunEdison spokesman Ben Harborne disputes the connection, saying the market slowdown correlated with the worldwide plunge in oil prices. The investors attracted to yieldcos, Harborne said, tend to be the same ones who buy master limited partnerships, the high-dividend owners of pipeline companies and oil explorers that were hit hard by the commodity collapse.

MLP Investors

“The timing of the Vivint Solar announcement and the yieldcos trading off is a coincidence,” Harborne said in an e-mail. “Many investors in yieldcos were also investors in the MLP space and had to sell down their holdings when oil fell.”

Whatever the reasons, clean-energy developers and their yieldco units broadly haven’t fared well since July 20, especially SunEdison and TerraForm. Maryland Heights, Missouri-based SunEdison has since seen its stock plunge since the announcement.

Buying Vivint would be a strategic shift for yieldcos because it means owning a new asset class -- rooftop solar -- that typically involves homeowners, not sophisticated investment-grade utilities, as buyers of the power.

“Vivint was very highly priced, a big premium for an asset class that was not as well-established and in some ways riskier than the utility-scale projects that yieldcos have traditionally known,” said Swami Venkataraman, a vice president at Moody’s Corp.

Since the purchase was announced, at least two companies, Lightbeam and Renewable Energy Trust, have put off plans to form holding companies, citing adverse market conditions. “It was part of our playbook,” said RET’s Morgan. “For us, that’s a tool that’s not going to work right now.

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