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 cash flow and economic value added
(EVA), a measure of shareholder wealth over time based on a firm's
profitability relative to its cost of capital.
Catherine Lacoursiere is a financial journalist who has covered
corporate and personal finance and the energy and environment markets from
New York and Silicon Valley for Investor's Business Daily, and
publications of the Economist Group and McGraw-Hill Companies. She is a
regular contributor to Energy Risk magazine and has made freelance
contributions to MSNBC.com, AOL's mutual fund site, and numerous energy
and alternative energy publications and reports. Catherine writes columns
and blogs on nanotechnology and clean energy investing for
InvestorIdeas.com, the Cleantech Venture Network, and
RenewableEnergyStocks.com.