Should we brace ourselves for a wave of consolidation in the solar sector? At the end of 2006 we saw SunPower (SPWR – Last trade $43.40), makers of the most efficient solar cell on the market, buy PowerLight, the world’s biggest manager of large-scale commercial solar projects. Some analysts expect more deals like this, where “upstream” manufacturers buy “downstream” players.
Solar manufacturers margins have increased rapidly during the worldwide silicon shortage that has restrained supply while increasing demand. Many suggest that we are likely to see the start of a wave of solar consolidation, as solar manufacturers are in a good position to buy.
But a word of caution: Don't confuse diversification with consolidation. The acquisition of PowerLight is a matter of diversification. Diversification makes "upstream" manufacturer margins more stable, as margins are expected to decline in the months ahead when supply issues are resolved.
There has been some chatter that Evergreen Solar (ESLR – Last trade $9.66) is setting itself up for sale. ESLR develops, manufactures, and markets solar power products. It uses its proprietary "String Ribbon" technology process in manufacturing crystalline silicon wafers. It is currently involved in a joint venture with Q-Cells (QCEG.DE – Last trade €45.59) called EverQ3. The total capital cost for all property, plant and equipment for the 30-megawatt factory is expected to be approximately $75 million.
Q-Cells is the world's second largest solar cell manufacturer with a year-end 2006 nominal production capacity of 420MW. Given their inflated margins, it would seem natural for them to be on the lookout for takeover targets. Is Q-Cells likely to move in on ELSR?
Many suggest that ESLR is setting itself up for a sale. The company seems to be more focused on building the EverQ3 plant than on their own 100% owned plant, and they have recently said that they plan to reduce the capacity of their Marlboro plant. ESLR suffers from a lack of polysilicon and has a weak balance sheet, limiting their ability to expand their internal capacity in the near term.
But let's not get ahead of ourselves.
ESLR shares recently dropped to a 52-week low around $7, but Q-Cells didn't make a move. Q-Cells have more due diligence on ESLR technology than anyone else. If they didn't make a move at the start of January (when shares were trading close to $7), it seems unlikely that they would make a move now. In addition, ESLR is subject to anti-takeover provisions in their charter and by-laws under Delaware law that could delay or prevent an acquisition. The company also has a staggered board of directors, which makes it difficult for stockholders to change the composition of the board of directors in any given year.
The solar market is entering a period of intense competition in the next few years, so you’ve either got to get bought or get bigger. ESLR is a company that is not going to get bought.
Disclaimer: I do not own any stocks mentioned above. I do not give investment advice. Do your own research. Do not rely on anything in this blog to make investment decisions. Consult an investment professional familiar with your specific financial situation before buying or selling any security.