Suntech Power (NYSE:STP) could be a step closer to selling its primary manufacturing subsidiary, Wuxi Suntech, after local regulators approved a bid by Shunfeng Photovoltaic International Ltd, a mid-sized Chinese solar manufacturer. Wuxi Suntech, which is located in China, holds several key assets including intellectual property, a bulk of Suntech’s panel manufacturing capacity as well as the company’s research and development unit.  The subsidiary is currently undergoing bankruptcy proceedings in China after Suntech defaulted on the payment of $541 million convertible note earlier this year. While it remains unclear as to how much Suntech Power will realize from a potential transaction, given that the exact financial terms of the offer are not available, we believe that it could help the company cut down its debt load.
What The Deal Could Mean For Suntech
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Suntech had mentioned that Shunfeng was provisionally selected as the best strategic investor for Wuxi Suntech, edging out other companies including the local government-run Wuxi Guolian Development Group. The deal would allow Shunfeng to quickly expand its operations and cater to the rising demand for solar panels without having to build out new manufacturing facilities from scratch. For Suntech, the outlook following a potential sale is likely to be somewhat more hazy. We believe that the sale would result in Suntech Power drastically scaling back on its panel manufacturing business since Wuxi Suntech holds most of the firm’s manufacturing assets. Per Suntech’s 2011 annual report (the company is yet to file its full 2012 results), the company had a total of 2.4 GW of annual capacity while the Wuxi subsidiary alone holds about 2 GW of the capacity.  However, the deal could help Suntech significantly cut down on its debt load since the subsidiary holds around $1.76 billion in debt (about 75% of the company’s total debt).
Shunfeng, which already paid a 500 million yuan (US$81.6 million) deposit to the court-appointed administrator that is overseeing Wuxi Suntech’s restructuring, mentioned that the acquisition would be “very substantial.” An anonymous source quoted by Reuters said that the administrators had set a floor price of around 2.5 billion yuan ($410 million) for the auction.  Adding on the debt of around $1.76 billion, this would give Wuxi Suntech an enterprise value of over $2.1 billion, assuming that the cash position is negligible. However, we remain somewhat skeptical as to how much Suntech Power will actually be able to realize from this deal given that its manufacturing facilities are believed to be older and less efficient, as it has not been investing in upgrades over the last few years. Suntech Power currently has a market cap of about $250 million.
As the next step, the Chinese creditors of Wuxi Suntech will have to approve the deal in a meeting that is scheduled for mid-November after which a local court will have to ratify.  We will be closely watching the developments, and note that our price estimate for Suntech Power could change based on the exact financial terms of the potential deal.Notes: