When First Solar (NASDAQ: FSLR) announced a strategic review for its stake in 8point3 Energy Partners (NASDAQ: CAFD) on April 5, 2017, it sent the yieldco into a tailspin. The stock dropped, its dividend yield rose, and co-sponsor SunPower (NASDAQ: SPWR) was essentially forced to announce its own strategic review.
Since then, the yieldco has seen its stock price surge. Since its drop the day after the announcement, 8point3 Energy Partner’ stock is up 20.3% and the dividend yield is down to 7.1%. That’s not the lowest dividend yield in the industry, but it’s low enough to potentially return to normal operations, acquiring projects that would be accretive to the dividend long-term, which is the point of a yieldco, to begin with. With this recovery in mind, here are the options for 8point3 Energy Partners given First Solar’s desire to find an alternative.
Why First Solar wants to sell
First, it’s worth exploring why First Solar wants to sell its stake in 8point3 Energy Partners in the first place. The move comes down to a strategic shift the company is making to either sell solar components to third party developers or sell projects it’s involved in early in the development process. First Solar no longer wants to own solar projects through completion and then drop them down to the yieldco.
The reasons for the strategy change range from the desire to turn inventory over more quickly to an avoidance of the risks associated with project development (i.e. currency, interest rate, counterparty risk). And if First Solar isn’t going to have assets to drop down to the yieldco, it doesn’t make sense to own a stake in 8point3.
In this light, it makes sense that First Solar wants to get out of 8point3 Energy Partners. But getting there may be more difficult than it seems.
First Solar’s options
There are really four options for First Solar’s strategic review of 8point3 Energy Partners. It could decide to hold the stake, sell its stake to a third party, the entire yieldco could be sold with the blessing of SunPower (which could veto a sale), or the assets could be sold off individually.
Replacing First Solar as a sponsor seems plausible. We could see a developer and/or utility like AES (NYSE: AES) or Dominion (NYSE: D) come into the fold, looking for a place to hold its own growing slate of renewable energy assets. SunPower has said that it would need a partner that has assets to drop down, and the list of companies that fit that bill is growing every day.
Selling the entire yieldco may also be an attractive option for a utility looking to expand its solar presence in one quick acquisition. I’ve suggested in the past that if NextEra Energy Partners bought 8point3 Energy Partners, it could essentially play dividend arbitrage. To me, it seems that a utility looking to make a splash in solar would be the most likely buyer and that First Solar and SunPower end up cashing out. SunPower, in particular, could use the cash to fund its own manufacturing plans.
An option that seems less likely after the yieldco recovery of the last few months is outright liquidation. The argument could be made that 8point3 Energy Partners was vastly undervalued in April, making liquidation appealing, but today that’s a less obvious conclusion.
Holding onto the stake is probably the last resort for First Solar, and would likely lead to problems for 8point3 Energy Partners itself. I mentioned that SunPower can’t support the yieldco with its own deal flow, so there may need to be a shift to acquire third-party assets or find another partner to bring into the fold.
SunPower could control 8point3 Energy Partners’ fate
The wrinkle in First Solar’s desire to sell its stake in 8point3 Energy Partners is SunPower. SunPower is actually a bigger shareholder and has a 50% vote in the holding company that controls 8point3 Energy Partners. And SunPower would like to have the yieldco to drop residential and commercial solar assets into in the future.
What could change SunPower’s mind is if it could get an infusion of cash in a sale. We’ll see what both companies decide if there’s a real offer on the table.
What a sale could bring
The ultimate decision to sell or hold onto 8point3 Energy Partners, for both First Solar and SunPower, could come down to what any potential offers look like. First Solar holds 22.1 million shares in the yieldco and half of the incentive distribution rights (IDRs), while SunPower holds 28.9 million shares and the other half of the IDRs.
If an offer of $17 or $18 per share comes along, it would be hard to see either company turning it down. For First Solar, an $18 buyout price would be worth $398 million; for SunPower, it would be worth $520 million, even before any IDR premium. Both companies could use that cash to fund manufacturing expansions or, in SunPower’s case, pay down debt. And if a buyer comes along, I could see this being a sale that’s a win for 8point3 Energy Partners shareholders, sponsors, and the acquirer, given the premium quality assets underlying the yieldco.
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