First Solar Never So Cheap in Takeover Boon

By Tara Lachapelle, Christopher Martin and Richard Weiss - Dec 22, 2011 8:27 AM GMT+0700

For acquirers willing to wager on the future of solar power, First Solar Inc. has gotten $22 billion cheaper.

First Solar has tumbled (FSLR) 76 percent this year, the biggest drop in the Standard & Poor’s 500 Index, as the Tempe, Arizona- based company lowered its profit forecast and shifted its focus to large power plants. Once worth $25 billion, First Solar was valued this week as low as $2.64 billion, the steepest discount to net assets since its 2006 initial public offering and cheaper than 94 percent of renewable energy equipment companies greater than $1 billion, according to data compiled by Bloomberg.

The world’s largest maker of thin-film solar panels may now attract takeover interest from General Electric Co. (GE) or Siemens AG (SIE) on the expectation that demand will increase in the $55 billion solar power industry during the next decade as prices become more competitive with fossil fuels and other forms of electricity, according to Robert W. Baird & Co. While short sellers have boosted bearish bets against First Solar to the third highest in the S&P 500, it could command at least a 50 percent premium in an acquisition, said Kaufman Bros. LP.

“Given the pull back in the price, it certainly does make a lot more sense for someone to buy out First Solar,” Jeff Bencik, a New York-based analyst for Kaufman, said in a telephone interview. “At the end of the day, First Solar is still profitable. So you are buying the best in the industry at a discount price. Certainly for both GE and Siemens it would diversify their energy platform.”

First Solar Restructuring

Alan Bernheimer, a spokesman at First Solar, Sean Gannon, a spokesman for Fairfield, Connecticut-based GE, and Philipp Encz, a spokesman for Munich-based Siemens, declined to comment on takeover speculation.

First Solar’s stock has plunged 25 percent since Dec. 14 when it reduced 2011 profit and sales forecasts, projected earnings next year that missed analysts’ estimates and said it will fire about 100 employees in the second restructuring in six weeks. The company is reorganizing to focus on large utility- scale power plants instead of smaller, rooftop installations after ousting its chief executive officer in October and replacing him with Michael Ahearn, the founder and chairman, on an interim basis.

More than 17 million shares, or about 20 percent of First Solar’s outstanding stock, are currently shorted, the third-most in the S&P 500 behind GameStop Corp. and Supervalu Inc., according to data compiled by New York-based Data Explorers. In a short sale, a trader borrows stock and sells it, hoping to profit from a decline by replacing it at a lower price.

‘Bad Neighborhood’

Plunging prices for solar panels have eroded profit margins across the industry as manufacturers ramped up production capacity faster than demand increased, creating a global glut of supply. The spot price of solar panels has fallen 47 percent this year, according to Bloomberg New Energy Finance, while crude oil prices have gained 8 percent in New York.

First Solar uses cadmium-telluride in its thin-film panels, which require less time and energy to manufacture than the more common ones based on silicon semiconductors.

“First Solar is definitely the best company in a bad neighborhood at this point,” Michael Horwitz, a San Francisco- based analyst for Robert W. Baird, said in a phone interview. “Eventually it probably makes sense for them to be part of a larger company.”

The market for solar power surged 67 percent last year to $55 billion on new projects with a capacity to produce about 18,000 megawatts, according to data compiled by Bloomberg. That’s equivalent to adding 18 typical nuclear reactors for electricity production.

Record Low Valuation

New solar installations may reach 24,000 megawatts this year and hold steady at about that rate next year, according to a Nov. 1 report from Jenny Chase, an analyst at Bloomberg New Energy Finance. Annual demand may climb to as much as 34,700 megawatts in 2013, she wrote.

First Solar’s shares closed Dec. 19 at a record low of 0.65 times book value, or the value of its assets minus liabilities, cheaper than every renewable energy equipment maker with a current market value greater than $1 billion except for wind turbine manufacturer Vestas Wind Systems A/S at 0.62 times, data compiled by Bloomberg show.

The combined equity and net debt of First Solar was valued at 0.9 times sales, also a record low, the data show.

‘On the Cheap’

“It would make a lot of sense for somebody to buy First Solar on the cheap while there is significant dislocation in the solar industry,” Michael Obuchowski, chief investment officer at First Empire Asset Management in Hauppauge, New York, which owns shares of First Solar, said in an e-mail. “Acquiring First Solar at the bottom of the market would be a very smart move for a number of large industrial companies.”

GE, the world’s biggest (SPX) maker of power-generation equipment, may be interested in acquiring First Solar to bolster its solar operations and take advantage of the company’s technology for power plants, according to GE investor Huntington Asset Advisors and analysts at Kaufman and Robert W. Baird.

“They could buy First Solar, which already has significant scale and is well ahead of where GE is,” said Horwitz at Robert W. Baird. “It would probably make more sense to buy than build. If you’re GE or Siemens, you already build power plants, you’re already out there talking to their customer base, so this would just be another option to bring to the customer.”

Solar Industry ‘Carnage’

GE, the largest wind turbine supplier in the U.S., bought a closely held thin-film maker this year that uses the same material in its solar panels as First Solar and announced in October plans to build its own solar plant in Colorado. The company is investing $10 billion by 2015 to develop environmentally friendly products across its large-equipment areas, including power generation, jet engines and locomotives.

“There’s a lot of carnage in the solar industry right now,” Jeffrey Immelt, GE’s chief executive officer, said at the company’s annual investor meeting in New York last week when asked about potential deals. He said GE’s preference is to build organically.

“GE loves to buy on the cheap,” Peter Sorrentino, a senior fund manager who helps oversee $14.5 billion, including shares of GE and Siemens, for Huntington in Cincinnati, said in a phone interview. “It’s not something that would be a real super competitive advantage, but at the right price, if it made their life easier, of course they’d do the deal.”

Siemens as Buyer

First Solar may also attract Siemens, the market leader in off-shore wind turbines, according to Horwitz and Kaufman’s Bencik. Siemens, Europe’s largest engineering company, is aiming for 40 billion euros ($52 billion) in sales with “green technologies” by 2014, up from 29.9 billion euros in the fiscal year ended Sept. 30.

“They have next to nothing in photovoltaics, and they may be able to combine their strength in wind power with photovoltaics,” the panels that First Solar makes, Thilo Mueller, who helps manage 100 million euros at MB Fund Advisory in Limburg, Germany, said in a phone interview. “It would make sense for Siemens, and they may be able to get First Solar for a comparatively cheap price.”

His fund owns Siemens shares, and he said he’s considering buying First Solar stock.

Still, Siemens’s solar investments have struggled. The company bought Solel Solar Systems for $418 million in 2009 to try to duplicate its success in wind turbines. Losses accelerated as governments curtailed spending on infrastructure and Solel’s solar thermal technology faced less expensive solar panels, leading Siemens to write down the value of the business.

Walton Family

Deals in the solar power industry reached $3.4 billion this year, the most since $6.1 billion in transactions were announced in 2009, data compiled by Bloomberg show, as targets sought partners to share project costs and acquirers took advantage of a drop in solar stocks.

First Solar shareholders, the largest of whom is the Walton family that founded Wal-Mart Stores Inc. (WMT) and own almost a third of the solar company’s shares, would likely demand at least a 50 percent premium in a takeover, Kaufman’s Bencik said. That would equate to $47.70 a share based on yesterday’s closing price. Total SA (FP) paid a 44 percent premium for a 60 percent stake in First Solar’s rival SunPower Corp. in April.

“Beauty is in the eye of the beholder,” Timothy Arcuri, an analyst for Citigroup Inc. in San Francisco, said in a phone interview. “If you’re bullish on solar and you think there’s ultimately going to be significant demand for these big solar farms around the world, there really is no other company on the planet today that can provision, develop and finance -- or get financed -- for these big solar farms.”

To contact the reporter on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Christopher Martin in New York at cmartin11@bloomberg.net; Richard Weiss in Frankfurt at rweiss5@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Reed Landberg at +44-20-7330-7862 or landberg@bloomberg.net.