By Vadim Mandel (London School of Economics)
Overview of the Deal
Sunrun (NYSE: RUN), America’s biggest rooftop- solar company has announced that it will be taking over rival Vivint Solar (VSLR) for $3.2bn in an all-stock transaction in one of the biggest deals in industry history expected to close in the 4th quarter, pursuant to which each share of Vivint Solar common stock will be exchanged for 0.55 shares of Sunrun common stock, representing a combined Enterprise Value of $9.2 billion.
Vivint Solar stockholders are expected to own approximately 36% and Sunrun stockholders are expected to own approximately 64% of the fully diluted shares of the combined company. The exchange ratio implies a 10% premium for Vivint Solar shares and a 15% premium to the exchange ratio.
Support Agreements have been obtained from both companies’ largest stockholders, 313 Acquisition LLC (Blackstone affiliate) and Tiger Global, to vote their respective shares in favor of the merger and the share issuance.
In addition, 313 Acquisition LLC (Blackstone affiliate) has agreed to lock up 50% of shares obtained as a result of the acquisition for 60 days following closing and the remaining 50% for 120 days. Sales are allowed to occur during these periods subject to certain conditions.
The market is fragmented, so the deal is unlikely to cause antitrust issues. It is estimated that the combined company will be ~20% market share followed by SPWR (Sunpower) at ~10% and NOVA (Sunnova) at 5%.
Thus, the deal makes Sunrun an undisputed leader in the space, cementing its status its competitors. Both Sunrun and Vivint combined provide over 75% of new residential solar leases each quarter according to BloombergNEF.
On the announcement, shares of Sunrun rose 25% while Vivint rallied 37%, on the backdrop of investor enthusiasm for the sector being revived from the pandemic lows as people consider alternative means of generating energy bills savings after staying at home for a prolonged time period, thus providing a fertile ground for installers to market their products.
Sunrun was advised by BofA and Morgan Stanley, whereas Vivint Solar was advised by Credit Suisse.
Acquirer Company Overview (Sunrun)
Sunrun is the largest residential solar company in the US. The firm specializes in the installation, monitoring, and maintenance of solar panels on homeowner's roofs in order to supply solar electricity. (Source Bloomberg)
Founded by Lynn Jurich in 2007
Chairman: Edward H Fenster
Number of Employees: 4800 (Dec 2019)
Tiger Global Management LLC (24.74%) (Source CNN Money)
BlackRock Fund Advisors (10.96%)
The Vanguard Group, Inc. (7.04%)
Neuberger Berman Investment Advisors (5.55%)
Fidelity Management and Research Co (4.57%)
Market cap: 5015 M USD
LTM Revenue: 874.8 M USD
LTM EBITDA: -27.3 M USD
LTM EV/Revenue: 7736.1 M USD
LTM EV/EBITDA: -283.37x
Target Company Overview (Vivint Solar Inc)
Vivint Solar Inc. provides renewable energy solutions. These include the design, installation, and maintenance of affordable solar solutions.
Founded in 2011
CEO/Chairman: David Bywater
Number of employees: 5000 (2015)
Key shareholders: Fidelity Management & Research Co…(10.11%), Excellence Investments Ltd. (3.24%), Arosa Capital Management LP (2.73%), Neuberger Berman Investment Advisers (2.72%)
Market cap: 2821.1 M USD
EV: 4525.2 M USD
LTM Revenue 362.8 M USD
LTM EBITDA: -80.7
LTM EV/Revenue: 12.47
LTM EV/EBITDA: -56.0743
Announcement date: July 6, 2020
Target Advisors: Credit Suisse
Acquirer Advisors: BoA and Morgan Stanley
The merger that will create the US largest solar power installers is likely to provide a number of run-rate cost synergies, estimated at $90 million on an annual basis.
These include consolidation and optimization of their branch footprint, reducing redundant spending on technology systems, scaling proprietary racking (installation) technology, and improving sourcing capabilities for their supply chains.
As a consequence of the deal, analysts predict that consumers should be able to benefit from lower prices as the NewCo may pass on run-rate cost synergy benefits due to increased operations scale and a larger R&D effort providing increased access to lower-cost manufacturing methods. The competition is likely to have to compete with lower prices offered by the NewCo as a result of increased purchasing power. This may thus result in lower costs passed on to consumers. Therefore, rival firms will need to develop new processes and strategies in order to compete with the lower prices and wider reach Sunrun will have as a result of this transaction.
Sunrun will become a leading owner of solar assets globally with nearly 500,000 customers and more than 3 Gigawatts of solar energy.
It is also worth mentioning that because the vast majority of US energy consumers are prisoners to a single power company, and with the increased electricity usage during the lock-down, more and more households are looking to save on their bills, thus looking at alternatives, which may have seemed unviable previously. The lower cost profile of NewCo’s product offerings coupled with reinvigorated marketing efforts post-pandemic may look attractive for US consumers to change their energy plan to incorporate solar power, thus the company may see robust growth in their consumer base by end of 2020 through to mid-2021.
The combination of R&D resources and a shared vision to “create a planet run by the sun” will enable the NewCo to speed up the offers of cutting-edge technologies such as virtual power plants and a variety of energy services programs to a larger target market.
Studies show that residential solar has reached only 3% penetration in the United States today and yet surveys show nearly 9 out of 10 people in the United States favor the increased adoption of solar power. The acquisition of Vivint Solar adds a
complementary direct-to-home sales channel to Sunrun’s platform, increasing NewCo's reach and capabilities in a growing market that is projected to climb from 11 percent of total U.S. renewable generation in 2017 to 48 percent by 2050.
Educating customers on the merits of solar energy is necessary in order to increase sales and installation metrics. Therefore, Vivint Solar’s highly skilled consultations field sales experts will be a crucial part of building a new platform to serve as ambassadors so that consumers continue to learn about the benefits of solar energy.
These ambassadors educate consumers on the wide-ranging benefits of solar energy through virtual consultations such as the financial benefits of installation on energy bills and the long value in committing to investing in sustainable energy. The transaction will enable the NewCo to add a complementary Direct-to-Home Sales Channel to the Platform and would accelerate operating and scale efficiencies to enhance customer and shareholder value.
Both companies have adapted to the current environment by accelerating digital lead generation efforts and rolling out contactless selling and installation. Thus, the synergy offers setting the foundation for structural cost reductions and improved customer experience. Therefore, there is scope for increased revenues as a result of access to a greater target market as well as higher margins due to reduced operating costs.
In addition, it is expected that additional revenue synergies will generate enhanced value creation for both NewCo’s customers and shareholders due to a larger base of solar assets. The NewCo is expected to offer batteries to the combined base of solar customers.
A higher reach of solar and battery assets also increases the value that NewCo can bring to grid services partnerships and strengthens its ability to deliver considerable value in that industry.
It also looks likely that there will be benefits from efficiencies in large scale project finance capital raising activities. This provides an excellent opportunity for NewCo to build an even stronger and more recognizable consumer brand in residential energy services.
Risks to the Deal
There are a number of risks that could affect this transaction. Firstly, if the Covid-19 crisis lasts longer than expected, there could be further disruptions to demand and supply as well as complementary markets, let alone direct marketing channels.
Secondly, there is a risk that the residential solar market could grow at a slower rate relative to expectations or shift toward homeowners making outright cash purchases that bypass lease and loan options.
The firm’s ability to grow depends on its ability to raise capital from third-party investors to fund investment for the rooftop solar systems and storage that support the provision of Sunrun customer service, so disruption to the capital markets could slow the firm’s growth prospects relative to expectations.
It is worth noting that Sunrun faces head-on competition from other national residential solar service companies and a host of regional and local companies. In the future, more utility companies may also look to add residential solar systems in unregulated markets, competing with Sunrun, and as the market matures, competition for customers could lead to depressed pricing and diminishing returns on investments.
Thirdly, as this industry is reliant on governmental support, there is a risk that Federal, State, and Local authorities are positioned to terminate or reverse tax credits, renewable energy credits, and other incentives or impose charges on rooftop solar customers who want to connect to the grid, which could hinder growth relative to expectations.
Moreover, the loss of key executives could lead to execution challenges and weakening of relationships. Lastly, in adverse economic circumstances, it is possible
that Sunrun’s customers could be late in paying their electricity bills or stop paying altogether, weighing on cash flow from operations.
Furthermore, growing solar equipment costs, rising interest rates could lead to higher system costs, which could slow adoption growth. A change in interest rates also may cause investors to assign a higher/lower discount rate in their NPV calculation, leading to lower/higher valuations.
“Vivint Solar and Sunrun have long shared a common goal of bringing clean, affordable, resilient energy to homeowners. Joining forces with Sunrun will allow us to reach a broader set of customers and accelerate the pace of clean energy adoption and grid modernization. We believe this transaction will create value for our customers, our shareholders, and our partners.”
David Bywater, Chief Executive Officer of Vivint Solar