Silicon Shortage Drives Global Solar MA

Silicon Shortage Drives Global Solar M&A 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. 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 as it was dragged down by Cypress Semiconductor's spin-off, SunPower, which reported lower than expected earnings due to the high cost of raw materials. Both Q-Cells and SunPower issued initial public offerings in December. "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.

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By: Catherine Lacoursiere