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By Catherine Lacoursiere
February 16, 2006
Acquisitions in the global solar industry are off to a strong start in 2006
following a major realignment in the solar industry. The recent sale of
Shell Solar’s crystalline solar business to SolarWorld was a clear
indication that the economics of the photovoltaic manufacturing business has
changed. Global merger and acquisition activity in the renewable energy
sector has been growing at just under 50 percent per annum for five years,
reaching $14USD billion in 2005, according to London, UK-based New Energy
Finance. Activity in the photovoltaics sector, which has been one of the
most acquisitive, is expected to increase.
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The worldwide silicon shortage is a major driver of the pickup in M&A
activity says Walter Nasdeo of Ardour Capital Partners. Over 90 percent of
global solar cell production is silicon based. Despite very high demand for
photovoltaic equipment, the raw material shortage is squeezing margins.
Solar World cited two major benefits of the Shell deal: one, it secures more
access to silicon supply and, two, monocrystalline solar technology provides
the highest yields and, thus, requires less silicon. The deal makes the
German photovoltaic supplier the largest solar power company in the US.
Amidst a major industry realignment, it is becoming hard to keep track of
all the new solar entities. In addition to solar IPOs, which led new issues
last year, many companies are acquiring a presence in the solar business to
capitalize on global demand growth in excess of 30 percent. Carmanah
Technologies Corporation (TSX:
CMH), which has established itself as a world
leader in lighting technology through its LED business, acquired Soltek
Powersource last year—a photovoltaic manufacturer and distributor—to become
the largest solar manufacturer in Canada. On the strength of its new solar
business, Carmanah reported record profits last quarter. Soltek, itself, is
the product of a number of global acquisitions.
Yet while solid opportunities to invest in the solar boom exist, the high
stock valuations and investor demand also raise concern of a solar bubble,
and not the ones used as a cover on swimming pools. At the other end of the
spectrum are solar companies that are emerging overnight through acquisitive
shell companies—stocks that are listed on a stock exchange but are not
actively traded.
While the number of potentially accretive deals is indeed finite, there are
discernable trends. Many companies are building core competencies in
promising technologies—nanosolar, thin films and building integrated
photovoltaics (BIPV). This month, Barnabus Energy (OTC BB:
BBSE)
completed its transition to a solar energy pure play, divesting its natural
gas assets and adding two more solar companies to its portfolio—Connect
Renewable Energy and Solar Roofing Systems—buying a presence in the fastest
growing sector of photovoltaics, building integrated photovoltaics. Barnabus’
core solar business has been the development of a patented solar
concentrator.
The raw materials shortage will also continue to drive deals across the
supply chain. In the charge to reduce costs, solar gear producers are buying
solar industry equipment suppliers with a view to improving efficiencies.
Ardour Capital’s Nasdeo expects to see more suppliers being bought up. In
Europe, Theo Kitz of Munich-based Merck Finck says that there are many small
solar companies that are too small to survive on their own, particularly
during the silicon shortage, offering opportunities to be bought out at
attractive prices.
Of course, the high solar stock valuations are providing currency to do
these deals while also raising concern that some solar stocks are
overvalued. This week, a few analysts cited high-growth Q-Cells, the world's
leading independent maker of solar cells, as overvalued. "Q-cells has quite
an aggressive plan to build new production lines but they all have trouble
securing the silicon supplies for existing production," says Kitz. In
addition to ramping up production lines, last year, Q-Cells entered into a
joint venture agreement with Evergreen Solar to manufacture Evergreen's
higher yielding String Ribbon solar cells.
In fact, many of these solar plays may be trading at a discount due to the
silicon deficit. Analysts note that capacity constrained solar gear makers
can sell anything they can produce. Fortunately, the silicon industry is
moving quickly to increase production. With the anticipated easing of the
silicon shortage in 2008, SolarWorld expects its Shell buy to help bring the
company from 50 percent capacity utilization today to 100 percent by
2007/2008. Kitz sees 20 percent upside in SolarWorld’s stock price based on
a blended analysis of discounted cashflow and economic value added (EVA), a
measure of shareholder wealth over time based on a firm’s profitability
relative to its cost of capital.
Disclaimer
Catherine Lacoursiere is an independent columnist for this web site.
Catherine Lacoursiere may hold long or short positions in any of the stocks
mentioned in this article and those positions can change at any moment.
InvestorIdeas.com Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article.
Catherine Lacoursiere is a freelance writer. Nothing in the articles should
be construed as an offer or solicitation or recommendation to buy or sell
any specific products or securities. Past performance does not guarantee
future results.
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