Solar shakeout will bring more failures, few deals

A brutal 2011 has left the solar industry dazed, damaged, and on the cusp of a major shakeout of weaker players that are more likely to shut down than be snapped up by their stronger rivals.

Solar subsidy cuts in top markets Italy and Germany prompted a 20 percent drop in the price of solar panels this year, bringing the fast-growing solar industry to a critical tipping point. Even companies that had been stock market heroes find themselves as the walking wounded, struggling to cut costs in a market awash with solar panels.

In the long run those price declines are healthy for an industry that relies on government subsidies to make its products competitive, but the pain is more than some can handle.

"The process of separating the wheat from the chaff may be under way now, and that may be a good thing," said Rob Stone, analyst with Cowen & Co.

Perhaps the biggest casualty so far is U.S. solar wafer maker Evergreen Solar. It was once at the leading edge of the solar world and boasted a market cap of $9.8 billion, but failed to keep up with Asian competitors and filed for bankruptcy protection last week.

A smaller, private U.S. solar company, SpectraWatt, followed Evergreen into bankruptcy this week after failing to raise money or find a strategic partner.

The European companies that helped drive the solar boom of the 2000s have also been among the hardest hit: Norway's Renewable Energy Corp and Germany's Q-Cells, once the world's top solar cell maker, both took massive writedowns in the last month for cutting production at European plants indefinitely.

Those companies' costs are far higher than their Chinese competitors, who swept into high-subsidy markets in Europe and handily stole market share from the industry stalwarts.

Like Q-Cells and REC, many of those still standing have cut production in markets where costs are higher to preserve declining capital. Germany's Solon SE, for instance, is closing an Arizona module plant, and BP Solar recently closed its Maryland manufacturing facility.

Anemic multiples
The carnage this year has sent valuations of solar companies into a tailspin, with price-to-earnings ratios shrinking to the single digits, in many cases.

The anemic multiples reflect worries among investors about future earnings, and analysts have said that the book value of the companies is a better guidepost to their viability.

But while cheap stocks often prove to be fertile ground for acquisitions, few deals have materialized so far.

In the most notable solar deal this year, U.S.-based SunPower won backing from French oil giant Total, which took a 60 percent stake and gave the solar panel maker a $1 billion credit line.

But few other manufacturers are likely to be attractive takeover candidates.

"It's going to be more akin to companies like Evergreen Solar not being able to compete and going under," said John Segrich, portfolio manager of the Gabelli SRI Green Fund. "Companies like Energy Conversion Devices or Q-Cells are probably next on the list."

Still, some deals will get done--and Asian players are expected to lead the way. Taipei wafer maker Sino-American Silicon Products said this month it is buying the wafer unit of Japan's Covalent Materials for $451 million, and this week Germany's Roth & Rau sold its CTF Solar thin film unit to an unnamed Chinese investor.

"Big Asian photovoltaic, and above all the Chinese players, will be the driving force in the sector consolidation," said Dirk Meyer, managing director of corporate finance at Equinet, a German investment bank. "What they really want and many of them do not have so far is a strong brand in Europe."

Still, many expect potential acquirers to have a high bar for deals given the weakened state of the industry.

High bar for deals
"Only companies with an interesting retail network and a good brand would be interesting for Chinese players," said Bjoern Glueck, portfolio manager at Lupus Alpha in Frankfurt. "Only buying a production plant in Germany is not an option."

Indeed, most of the consolidation is likely to be focused on niche areas of technology that allow brand-name companies to improve their efficiencies or bring better products to market.

"It's cheaper just to add brand new capacity by buying new equipment than it is to go buy second-hand equipment or a second-hand company," said Segrich.

That influx of new capacity combined with a dearth of buyers to prop up weaker players will ultimately lead some to shut down operations.

That would help alleviate oversupply in the market and give some breathing room to the stronger, existing players who may be looking at global demand growing at 10 to 20 percent through 2012 rather than the 35 percent rate that had been the norm.

"Capacity needs to be taken out of the market," said HSBC analyst Christian Rath.

For those who can hold on through the current turmoil, the dramatic drop in the price of solar power will only help to create fresh demand for the technology that has been closing the pricing gap with fossil fuels.

"Every time prices fall to new levels, that opens up layers of demand that were maybe not accessible before," Cowen's Stone said.