Rain check on a green buying spree

Green energy M&A is firmly in the spotlight, but who would be brave enough to buy in this market?

The plunging share prices of green energy manufacturers has fuelled speculation of a takeover spree – but there is a catch: finding a buyer in a falling market.

The same share price collapse which saw renewable energy companies emerge as bargains makes them risky until the bottom of a continuing fallout is more clearly in sight.

The acquisition of a majority stake in SunPower by Paris-based oil major Total last year is illustrative: shares in the US solar power manufacturer have since lost three quarters of their value.

Charts in leading wind and solar shares exhibit the history of green energy and climate change policy, but the near-term future is still uncertain.

Stocks peaked during unbridled enthusiasm in 2008 when European countries threw cash at the sector to meet newly forged carbon and renewable energy targets, and in the run-up to a global climate summit in Copenhagen.

Shares collapsed during the global financial crisis.

But green stocks continued to fall, and underperform wider markets: Copenhagen failed to deliver; shale gas discoveries killed the economics of green energy in the United States; and a Chinese ramp-up in manufacturing created a global glut, crushing equipment prices and contributing to a pullback in western subsidies.

The collapse has fuelled expectations of consolidation.

Leading wind turbine manufacturer, Denmark's Vestas, has been a regular focus of takeover speculation. The company has lost 93 per cent of its market price since a peak in mid-2008, and as the biggest pure wind company, its purchase would allow a decisive entry into the sector.

It's now valued at about 10.5 billion Danish crowns ($A1.8 billion), relatively modest for a company with a record order backlog worth 9.6 billion euros ($A12 billion) and the world leader in a growth market.

The trouble is that its orders are on breakeven margins.

The world's lowest cost solar panel producer, US leader First Solar, tells a similar story of a share price collapse, down 94 per cent from its 2008 high.


Some takeover speculation is company-specific.

Indian wind turbine maker Suzlon, owner of Germany-based REpower, faces debt repayment deadlines later this year on foreign currency convertible bonds.

As Suzlon's share price is far below the strike price to convert the bonds to equity, creditors will demand cash. Cash-raising options include a partial listing of its German arm, surely a more likely outcome than an outright sale given the great effort Suzlon took to acquire its German arm.

Other speculation is generic to the sector: manufacturers have seen plunging price-earning ratios – a standard measure of valuation dividing market capitalisation by net profit.

Vestas presently has a negative P/E (minus 10.3), reflecting negative earnings, a discount on previous years (P/E of 31 in 2010, 71 in 2009, 16 in 2008 and 123 in 2007, according to Vestas figures).

As well as discounted valuations, the renewable energy sector offers long-term prospects, as rapidly falling prices herald sharper competitiveness with fossil fuels, while markets remain fragmented, offering opportunities for strategic partnerships.

In wind power, Chinese makers could use local partners in export markets, to avoid transport costs and build servicing businesses.

Buyers anyone?

There is no shortage of potential buyers, says Barclays clean technology analyst, Rupesh Madlani. These include Chinese renewable companies; international industrial conglomerates; and financial buyers such as private equity firms.

The catch is that equipment prices are still falling, squeezing margins and incomes, weakening companies both as attractive targets and robust acquirers.

Chinese manufacturers are not immune: second-biggest turbine maker Xinjiang Goldwind Science & Technology Co last week warned that first-quarter net profits may be wiped out by market headwinds.

They may not have the cash for big acquisitions, for example of Vestas, but generous credit lines remain available.

Nevertheless, it makes sense that activity for now is of minority stakes, or mergers between smaller companies: that could change as the continuing shakeout favours the last companies standing, and as prospects clear.

For example, the shape of US wind power support is likely to be clarified by the end of the year.

In the meantime, major outright acquisitions may depend on cash-rich, industry outsiders prepared to take the same risk as Total.

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