Is Total’s Generous Offer for SunPower Stake Justifiable?

May 12th, 2011 by Trefis Team
SPWRA: SunPower logo
SPWRA
SunPower

SunPower (NASDAQ:SPWRA) saw its shares shoot up from just around $16 to its current levels of above $21 with the announcement that Total intends to acquire 60% of the solar company’s equity at $23.25 a share. [1] With the oil & gas supermajor offering a premium of almost 50% to the prevalent share prices, we take a look at whether the $1.38 billion investment can be justified.

SunPower manufactures and distributes silicon-based solar cells and also produces solar power products for installation on residential and commercial units. The company’s primary competitors include First Solar (NASDAQ:FSLR), SuntechPower (NYSE:STP), and Yingli Green Energy Holding Com (NYSE:YGE).

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We continue to hold our price estimate of  $16.22 for SunPower’s stock.

SunPower’s actual gains from the deal…

SunPower’s most direct gain from the deal is the $1 billion credit support it will receive from Total. The credit, which is available to SunPower’s global utility power plant and large commercial installation businesses, would allow for accelerated business development and expanded manufacturing capacity with lower cash requirements.

SunPower would also gain access to Total’s extensive supply network around the globe, and would obtain research and development investments that can be directed at further reducing the company’s costs.

… and how it will affect the company’s value

Prior to thedeal, SunPower had announced its strategy to reduce its manufacturing cost per watt, with a target of reducing costs to less than $1 per watt by 2014. With the deal expected to help SunPower increase its manufacturing capacity and concentrate its R&D efforts, this would be reflected in a further reduction in manufacturing costs.

If the deal results in costs being brought down to $0.90 per watt by 2014 this would justify SunPower’s current stock price of around $21.50.

While a small portion of the remaining difference between the $21.5 market price and $23.25 offer price can be attributed to a reduction in supply costs over the years, the rest would simply be a premium to keep other potential buyers at bay.

See our complete analysis for SunPower’s stock here

Notes:
  1. SunPower and Total Partner to Create a New Global Leader in the Solar Industry, SunPower Press Releases, April 28 2011 [↩]