A Solar Merger That Just Closed Will Transform the Industry – Barron’s

Contractors prepare to install a Sunrun Inc. solar panel on the roof of a new home in Sacramento, Calif.

David Paul Morris/Bloomberg

The country’s two dominant solar development-and-installation companies completed a merger on Thursday, and it is likely to change the industry considerably going forward.

Sunrun (ticker: RUN) bought rival installer Vivint Solar, and the two companies now serve about 500,000 customers, with the capacity to supply more than 3 gigawatts of power. In the U.S., there are about 1,100 gigawatts of utility-scale electricity-generating capacity, and most of that is from fossil fuels. That means Sunrun has a lot of potential runway.

Before the deal, Sunrun was the number one player and Vivint was number two. Analysts estimate that together they control about one-fifth to one-quarter of the market. The industry, which includes a lot of small local companies, hasn’t had a large player like this before.

Installing solar panels on people’s roofs has been a fragmented and barely profitable enterprise for years. Sunrun and Vivint tend to sell their solar systems in lease-like deals, installing the systems for little or no up-front charge and billing people each month for the power they produce. Their pledge to customers is that their overall electricity bills will be lower than they would be under a traditional utility.

Scale will allow the companies to become more profitable. Because they incur costs up front and get paid back over time, the earnings of solar installers have been spotty and hard to predict.

The companies expect to cut costs and get more efficient through the merger. They forecast $90 million in annual cuts after the deal, and think they can get large benefits from scale—including in procuring equipment and getting better financing. In addition, better margins should allow them to expand into more states where solar wasn’t previously profitable.

“We’re in 22 states today and I’d like to be in 50,” said David Bywater, Vivint’s CEO who will now be on the board of Sunrun and help run the transition. “The difference between the 22 that we’re in and the ones we’re not in is really around the economics. As you get scale, you can impact your cost curve significantly.”

Customers and partners will flock to a brand name they can trust, he argues.

“We have a clear leader now,” he said. “People know who to turn to. There’s a whole slew of people in this ecosystem that are looking for a reputable, well-managed very focused disciplined leader in the industry to bet on.”

With the new company sporting a $17 billion market cap and a $22 billion enterprise value, they may also be able to attract new investors that had previously shunned smaller-cap solar stocks.

Solar was “stuck in this small cap world,” Bywater said. “We believed that if we got together we would break into the midcap or large cap. People can now write bigger checks and we’re now in a bigger investment pool. They now have a vehicle they can support.

Sunrun can also become a one-stop shop for all sorts of home-electrification products, Bywater says. Already, one third or more of customers are buying batteries along with their solar panels, allowing them to go completely off the electric grid if they want. And as more items become electric, they will likely want other products too.

“When they agree to go solar on their roof, they are so much more inclined to do everything else that helps to bring clean alternative energy,” he said. “There are so many things that you can electrify, whether it’s water heaters or whatever it may be in the home that helps that home be a smarter home. It doesn’t start and stop with the panels on the roof. That’s the beginning.”

The company sells electric-vehicle charging stations too.

“The future of the gas station isn’t on the corner. The power station is in your garage,” he said.

The Vivint deal also shows that investing in solar isn’t just a feel-good exercise in helping the planet. There can be substantial financial gains in it. Blackstone (BX) bought Vivint Solar in 2012 when it was just a small part of a larger home-security company called Vivint Smart Home (VVNT). Blackstone’s deal for both companies cost $2 billion. Vivint Solar became its own company in 2014.

The Sunrun deal gave it an enterprise value of $3.2 billion. That number has risen along with the value of Sunrun’s stock, which has more than tripled since the day before the deal was announced in July. In addition, Vivint Smart Home is itself worth more than $3.6 billion.

Sunrun shares fell 9.6% to $70.54 on Thursday. The Dow Jones Industrial Average rose 0.4%.

Write to Avi Salzman at avi.salzman@barrons.com

Source: https://www.barrons.com/articles/solar-merger-just-closed-will-transform-the-industry-51602191654

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