Powerlight Acquired by SunPower for $330 MM! – Consolidation in Solar Begins

SunPower Corporation (Nasdaq: SPWR) today announced its acquisition of Powerlight, one of the largest solar integrators and installers in the world. Here’s a link to their presentation.

This specific acquisition has been rumored for some time, and we alluded to it in our earlier blog after Solar Power 2006 Conference:

“Possibly as a reaction to the supply chain dynamics, I heard the first widespread discussions to come to my attention regarding potential M&A activity in the PV integrator sector. The rumour mill was rife with whispers that integrators of varying sizes are on the block, including a number of brand names. The question previously had been, when are we going to see consolidation in the PV integrator sector. The new question that was put to me at the conference was this, if so many integrators are interested in selling out now, do they know something that we don’t about near term market prospects?”

Strategically this vertical integration in the solar sector make sense for SunPower – Powerlight represents nearly 20% of their revenues, and it will provide a captive outlet for the increased production they are bringing on line, as well as create a brutally strong vertically integrated powerhouse in the California market. This at a time when the silicon supply shortage is loosening as competitors are ramping up production – SunPower was going to need that distribution to defend margin.

For Powerlight, we have been saying for sometime that PV solar integrators were getting squeezed by the silicon shortage, rising commodity and labor prices, and increased competitive pressure, and as a result would need to innovate product, gain scale fast, or sell. And all three approaches are risky. Powerlight is no exception. The company launched some extremely innovative rooftop products in the last few years that helped create the grid-linked commercial scale photovoltaic market in California. However, in recent years their newest product innovations, while progressive, have not provided as much differentiation. And growth in solar installations in Germany outstripping California has probably eroded their historical procurement pricing power. So for Powerlight it wasn’t whether to the deal, it was who to do it with, and what price can you command.

In short, both players probably came out winners.

Whether it hamstrings either SunPower or Powerlight’s market approach (historically Powerlight has been a large enough consumer of panels to command premium pricing by playing suppliers off against each other) remains to be seen. SunPower has been known as a high efficiency solar cell provider, not a low cost provider, which may not play perfectly into this equation. And SunPower has been providing panels to providers of new, innovative rooftop product manufacturers like Open Energy, which compete with Powerlight.

Also, as usual, the Energy Blog has an excellent overview of the SunPower product and business here.

As to the purchase price, the detailed financials on Powerlight have not been announced yet, but it would seem to me to be a rich price to pay for a solar integrator, even one of the major ones like Powerlight. But with SunPower trading at an eye-popping 14x revenues, Powerlight will add a lot of much needed heft, so they can afford it (At $330 mm the purchase price is some cash plus < 10% of their SunPower's market cap, with 60% of the price in stock and a 25% earnout of sorts – and it drives them to a targeted $600 MM in revenue in 2007). It still leaves SunPower with lots of cash on the balance sheet and an earnings positive business. It's a fitting follow-on at the one year anniversary of SunPower's IPO.

So bottom line, if I were trading at 14x revenues and looking at a loosening silicon supply situation headed my way – I’d give up c. 1/3rd of my cash and c. 5% of my company to get Powerlight’s distribution in a heartbeat, too.

Excellent job, SunPower and Mr. Werner. Hope it works out. And trust me, this is only the first deal to be done in this market – but maybe the best.

11 replies
  1. Greg Chang
    Greg Chang says:

    Hi Neal, good to hear your thoughts on this deal. What do you think are the advantages and disadvantages of being vertically integrated in the solar power industry? PowerLight has compared itself to Dell so this seems somewhat like Intel buying Dell, which would not neccesarily make the most sense in the world.

  2. Anonymous
    Anonymous says:

    This match-up doesn't make sense to me. What can the two companies do together that they could not do separately? (via JV or flexible purchase orders)It will clearly drive other installers away from buying SunPower product (or at least make them less eager buyers). Solar module suppliers will be wary of selling too much product to Powerlight because they could lose that outlet at SunPowerLight's whim.Perhaps SunPower just felt $330 million was an opportunistic "good deal" to good to pass up…but in that case why is everyone saying it was a great price for Powerlight? Together the companies may lose focus.I'm scratching my head on this one, the risks seem greater than the reward.

  3. Anonymous
    Anonymous says:

    Great Deal for the future! Win/Win – protects each from the Moore's Law of solar – price must decline by 1/2 so Spwr would have to produce 2x to stay in place.Spwr – sell watts a $3.50 and 30%Gross MarginPowerLight – sell $8.00+ installed at 15% GMCombined – sell $ 8.00 at 28.5%+Spwr ends up 2.1 x more margin Great $ at 400kw and 1000kwThis is a great deal!

  4. Anonymous
    Anonymous says:

    Anonymous certainly makes up for in enthusiasm what he lacks in logic.According to Anon, SPWR makes ~$1 in margin per watt and so does Powerlight. Fair enough.Combining the two into one does indeed mean that combined they now make ~$2 in margin. But they are still doing more activities (making panels + installing) so they don't elimanate cost.But if the price of solar falls by 50% they will at that point only make ~$1 combined, which means they will have to sell 2x to stay in place. How is that win/win?

  5. Anonymous
    Anonymous says:

    This is a powerful deal:400kw SPWR at $ 3 @ 30%GM = 360 Million GM 400kw SL at $7 @ 15%GM = 420 Million GM400kw Comined at $7 @ 27.85%GM = 780 Million GMSome great synergy benefits possible to enhance PBT Numbers look better as scale grows.EPS will be strong long term – increasing share price. Way to go Tom, Tom and Manny

  6. Nick
    Nick says:

    The solar market is strong as a result of realization that an accelerated learning curve is needed to cut costs and deliver solar power for less than $2/Wp.The SunPower/Powerlight deal does not bode well with the above and may hinder the trust in the competitiveness of solar energy in large scale applications.

  7. Anonymous
    Anonymous says:

    If residential/commercial is $8-10 wattand power plants $6-8 now – the $ 2 watt will come in time ? 14yrs as SPWR/PowerLight move down the learning curve.SunPower is innovating to 22% effic, watts/gram silicon and packaging from 72 cells(6×12) to 96 cells(8×12), fewer connections/panels per watt – this improves all the cost/watt metrics and improves ROI for Solar installation.Full cost of coal/nuclear is higher if full costs of emmissions and waste storage are figured correctly. The combined spwr/pl company will have more resourcees and money to continue to innovate to extend solar adoption.

  8. Nick
    Nick says:

    Do we have to wait 14 years to see if silicon by incremental improvement of efficiency, interconnect reduction, etc will manage to reduce the cost enough? It is like holding mummy’s hand forever. Anonymous is obviously highly skilled in figuring the future of silicon PV, but I can not escape the feeling that he is making his assessments without considering the potential of other solar technologies.

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