Admittedly, it does not take a lot to get conspiracy theorists fired up, but the deal announced Thursday night between Total SA (NYSE:TOT) and SunPower (Nasdaq: SPWRA) should have some of them foaming at the mouth.
Many energy companies bought solar power companies in the 1970s and 1980s, only to find that the technology was far from a point where it was commercially viable (conspiracy theorists choose to believe that the energy companies deliberately "killed" solar power to maintain the hegemony of fossil fuel). Now the picture may be different. While solar still requires sizable subsidies to make economic sense in many places, the technology has gotten much better and solar assets may prove invaluable to energy companies looking to diversify and stay relevant for the long term. (For more, see Spotlight On Solar Stocks.)
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The Terms of the Deal
While SunPower is characterizing the deal with Total as a "strategic partnership," the reality is that Total will be acquiring 60% of the company's shares and will effectively control the company's board. For this, the company is paying $23.25 per share (nearly $1.4 billion in total), a 45% premium to Thursday's close.
Total is also extending $1 billion in credit support to help accelerate the growth of the company (and this has been a chronically capital-hungry industry).
What Total is Getting
If Total wants to be in solar power, SunPower is a great choice in some respects. SunPower is struggling like many solar companies to cope with the political and economic turbulence; over 100MW of projects are on hold in Italy (also impacting First Solar (Nasdaq:FSLR), Energy Conversion Devices (Nasdaq: ENER) and Canadian Solar (Nasdaq: CSIQ)). What's more, the company gave a preview of its quarterly financial results and the revenue was not impressive, as it came in below the company's own prior guidance.
That said, SunPower's crystalline silicon panels are at or near the top of the heap when it comes to conversion efficiency, and that makes it competitive with cheaper panels from the likes of Trina Solar (NYSE:TSL) and Yingli (NYSE:YGE). Moreover, while SunPower's manufacturing costs are still high, added scale and low-cost capital from its ties to Total could reduce those with time. (For more, see Top Solar Stocks To Watch.)
This could be a mutually beneficial deal in many respects. Apart from a lower cost of capital (significant given that SunPower has spent more than $550 million on capex in the last three years), Total may be able to give SunPower an edge when bidding for utility-scale projects. What's more, Total could likely put this technology to work almost immediately; it takes energy to pump out energy and there would seem to be huge potential for solar power arrays in Middle East oil and gas projects.
Is this the beginning of another round of non-petroleum diversification for energy companies? Maybe. The arguments for Total's interest in SunPower could just as easily apply to companies like BP (NYSE:BP) or ExxonMobil (NYSE:XOM), and it's a natural fit alongside other greener initiatives at Total, like biodiesel and its biofuels partnership with Amyris (Nasdaq: AMRS).
With that in mind, First Solar and MEMC Electronic Materials (NYSE:WFR) could get a look from an M&A perspective. In contrast, the Chinese operators like Trina, Yingli, and Suntech (NYSE:STP) are not likely candidates as their business models are much different.
The Bottom Line
For all of the attention that solar, wind, biofuel and other energy alternatives get, most of their proponents don't like to acknowledge that the economics just aren't there yet. Perhaps Total can help fill in the blanks or simply keep the company capitalized and moving forward as the technology improves. In any case, it is not a large investment to make for a promising call option on a possible energy future that does not involve such a high contribution of fossil fuels.
In the meantime, shareholders should wonder why Total didn't buy the whole company. Is it, as SunPower indicated, from a desire to maintain SunPower's "culture and currency"? Or is it simply a way of hedging risk - reducing the upfront cost and offering the possibility of buying the rest if the market sours again and valuations plummet? (For more, see Five Companies Leading The Green Charge.)
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