SunEdison changes direction after wind spree


October 12, 2015

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What connects the Chinese economy, a balloon and the fall of the Roman empire?

The answer is that they are three examples of the principle that nothing keeps growing forever, and last week we saw another. US renewables giant SunEdison has reversed growth plans after its share price dropped by more than 70% in the last three months.

It is a major turnaround. In the last 10 months, SunEdison has been growing thanks to a huge period of acquisitions. Indeed, even as recently as June, we wrote that SunEdison would stay acquisitive — and it did, with buyouts of Mark Group and Vivint Solar in July. Last week, Mark went into administration, which the company attributed to reasons including UK solar policies.

These two acquisitions followed takeovers of firms including First Wind and Continuum Wind, and other portfolio deals.

Now that period of acquisitions looks to be at an end. Last week, SunEdison announced plans to cut 1,000 jobs, which equates to 15% of its workforce, and stop selling completed wind and solar projects to its yieldco TerraForm. Like SunEdison, TerraForm’s share price has fallen, meaning it does not have the money to buy completed schemes.

This will force SunEdison to find outside buyers for its schemes and is another warning sign for US yieldcos, where many investors are questioning the sector’s long-term stability.

SunEdison has also announced it would stop investing in nations such as the UK in favour of the higher margins on offer in the US. Outside the US it is focusing on India, China and South America, which potentially offer higher returns. And it plans to scale back 20% of the projects in its development pipeline.

Finally, it plans to simplify its structure, to remove the duplication of back-office services that is inevitable after such a large number of acquisitions. The company hopes that this revised strategy would help to win back investors, and its share price has rallied.

However, it is early days and getting onto a stable financial footing could take years — although SunEdison will hope to do it sooner.

The main reason for this strategy shift is that SunEdison has not reported a profit since 2013, and investors are now clearly expressing doubts about the company’s long-term strategy.

The principle of diversifying into wind makes sense so that the company is not over-exposed to solar, but the way it has gone about this expansion looks rushed. It has made a series of major acquisitions, but investors are now asking whether there is a solid plan underpinning this growth; and what impact adding so many new firms will have on existing operations.

The developer is also suffering from wider problems with yieldcos.

NRG Yield chief executive David Crane said in August that competition from yieldcos had driven the cost of these assets to unreasonably high levels. This in turn makes investors worry about whether they will get the returns they expect if they invest in yieldcos, and less people now see this as an attractive option. Less money into yieldcos means less chance for developers like SunEdison to sell their completed projects into these yieldcos.

But the problems surrounding yieldcos should not gloss over the concerns about the firm’s huge buying spree. Growth by acquisition can be a great way of growing quickly, but it also brings a lot of upheaval — and that is what SunEdison must now cope with.

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