By Jack Calderon, Chaim Lubin
The last quarter has been a difficult one for the solar industry. With stock prices declining and margin pressures on panel manufacturers increasing due to the drastic drop in panel prices, the industry is faced with some significant challenges. However, despite the past difficulties, the outlook for the solar industry remains positive, with 2011 expected to exceed 20 GW of systems installed. While growth is expected to slow during 2012, the industry is still expected to continue expanding with year-over-year growth anticipated to be more than 10% (source: European Photovoltaic Industry Association). During the Last Twelve Months (LTM), as of September 30, 2010, all categories in the solar industry expanded revenue, however relative to the same period a year ago, all segments of the value chain experienced slower growth, mainly due to the current pricing and competitive dynamics. The slower growth and adverse market dynamics have resulted in companies being shaken out of the market, such as Solyndra, and continued consolidation through Mergers and Acquisitions (M&A). Both of these trends are expected to continue as the industry matures and as companies build more competitive business platforms for the future.
As measured in Lincoln International’s quarterly ‘Solar Energy Deal Reader’, 49 solar energy transactions were completed in the third quarter of 2011. This level is 23% higher than the 40 transactions that occurred in the second quarter of 2010 and exhibits 29% growth from the level of transactions experienced this same time last year.
Consolidation continues to be a large portion of the M&A activity, however over the last several quarters, there has been an increase in private investment in the solar industry. In fact, in the third quarter of 2011, private investment in solar--with 20 transactions, or 41% of the quarterly total--outpaced consolidation, which exhibited 19 transactions, or 39% of the total, for the first time in over two years. The next largest transaction category in the third quarter of 2011 was transactions classified as vertical integration, with six transactions, or 12% of the quarterly total. Lastly, transactions classified as companies entering the solar industry through acquisition accounted for four transactions, or 8% during the quarter.
One key theme that remains steady relative to last year, is that the majority of market interest is still focused on acquiring solar projects, pipeline of solar projects or ongoing generation assets. Despite the transaction category, more than 77% of all transactions have been of companies classified either as Producers or Solar Energy or as EPC Integrators/Developers. These companies, solar projects or solar generation assets provide an acquirer the benefit of retaining control over the pipeline and a valuable proposition in a highly competitive market looking for projects to install a significant supply of panels and other components of an overall solar system. This strategy could be a strategic advantage to companies because having control of the pipeline can give a company significant control over the entire value chain.
Beyond the acquisition of pipeline, the next most active sector for M&A in the third quarter of 2011 was within the Cells/Modules sector, with seven transactions, or 14% of the third quarter total. This is a significant increase from the second quarter of 2011, which had only four transactions in this sector. Three transactions involved companies categorized as solar equipment providers and two were within the Wafers/Ingots sector, or 6% and 4% of the third quarter total, respectively. The least active sector for M&A during the third quarter of 2011 was with companies classified as Vertically Integrated, which continues to be a minimally active sector for transactions with only six completed transactions in the last three years.
From a geographic perspective, the majority of transaction activity continued to be generated within Europe with 25 transactions, or 51% of the quarterly total. The next largest area for transactions was within the United States and Canada with 12 transactions completed, or 24% of the third quarter total. While there is significant global interest in making acquisitions in the solar industry, only six transactions, or 12% of the third quarter total, were classified as Cross-Border. This particular statistic highlights the opportunity to increase interest for a particular company or solar project by accessing potential purchasers on a global scale. Transactions in Asia rounded out the geographic classifications with six transactions completed, or 12% of the third quarter total.
Within all advancing industries, companies and investors utilize M&A in order to better position themselves and earn higher returns by building advantaged and more competitive platforms. The solar industry is no different and has reached a stage of maturation where M&A opportunities are helping develop the incumbents of tomorrow by acquiring the participants of today.
Jack Calderon is Managing Director at Lincoln International (www.lincolninternational.com) and co-heads the firm’s Renewable Energy Group.
Chaim Lubin is an associate at Lincoln International and a part of the Renewable Energy Group.
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