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.
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.