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Middle Market Deals

J. Calderon	J. McManus

The entrée into alternative energy deals is underway. Undeterred by the credit markets, some innovative M&A firms are staking out their positions. One such firm is Lincoln International. We asked Jack Calderon--Managing Director and head of the firm's global Electronics and Solar Energy Group--and John McManus--Senior Research Director of the global Electronics and Solar Energy Group--for their take on the future of solar deals.

M.A.: What is happening overall in the solar space that is fueling M&A deals?

J.C. & J.M.: There are three underlying market trends impacting M&A deals in the solar space. First, the lack of residential and project financing is slowing growth and precipitating the consolidation of installers and integrators. We're also seeing that solar cell manufacturers are seeking to make acquisitions of installers for distribution purposes. Finally, excess capacity in the supply chain -- especially in panels -- is driving prices down thereby forcing consolidation among panel suppliers.

M.A.: Your renewable group is approximately two years old. How many deals have you closed in this space? And why the drive in this sector at this time?

J.C. & J.M.: Given Lincoln International's global reach and capabilities, we've been actively involved with solar transactions throughout the globe. Most notably, we have completed several project financing and advisory transactions in Spain and have also been hired for one advisory assignment in Japan. Right now, there's significant opportunity within the domestic market, particularly given the tremendous demand for solar in the U.S. This is partly driven by President Obama's stimulus legislation, which includes significant provisions to spur growth and activity in the solar industry. Additionally, there is unique opportunity for solar companies to capture additional value by divesting their manufacturing capabilities.

M.A.: Are you seeing more M&A activity on the buy-side or sell-side at this time, where and why is this so?

J.C. & J.M.: The majority of the activity is being driven by sell-side transactions as indicated by the consolidation seen in the industry. However, as a firm, we are seeing more activity on the buy-side here in the U.S. as parties are looking to acquire assets at opportunistic valuations.

M.A.: What advice are you giving buyers?

J.C. & J.M.: This is a great time to deploy capital to expand geographic markets, product offerings and customer base.

M.A.: What advice are you giving sellers?

J.C. & J.M.: If sellers are looking at a sale of their entire business, we're advising them to hold off if they can. Valuations are down, and we believe they will increase going into 2010, particularly as the economy and the solar industry improves. We are also advising solar companies to capture additional value now by divesting their internal manufacturing capabilities to free up valuable working capital and enable them to focus on their core competencies.

M.A.: What is happening in terms of installation and manufacturing, and how is this impacting deals?

J.C. & J.M.: Installers are being severely impacted by the unavailability of bank financing. This is causing projects to be delayed or not completed and, as a result, someone with funding has the ability to step in and take over these projects through a transaction. Panel manufacturers are going down stream and going into the installation business consummating additional transactions.

M.A.: How is the industry's outsourcing important to the M&A deal pipeline, and why do you think this is so?

J.C. & J.M.: We see outsourcing as a major trend in a capital constrained economy as solar companies realize that they need to focus their capital on technology and other core competencies outside of their internal manufacturing. There exists an opportunity for these solar companies to divest their internal manufacturing as a means to generate additional value and capital. This type of transaction is the same as the transactions that occurred historically with EMS companies and larger electronics OEMs. Lincoln has completed more EMS transactions than any other investment bank and therefore has the knowledge and expertise to successfully complete these transactions in this sector.

M.A.: What kinds of financing are you seeing in this space? And do you foresee the current trends continuing post credit crisis?

J.C. & J.M.: Currently, there is project financing through Power Purchase Agreements ("PPAs") for utilities, municipalities, and large commercial customers, which will likely continue beyond the credit crisis. In addition, more residential financing options should come back post credit crisis.

M.A.: How does project financing, in the solar space, differ by region (E.U., Asia, U.S.)? Related, where do you think M&A dealmakers are seeing the greatest IRR and why?

J.C. & J.M.: In the U.S. there exist funds (i.e. Solar Power Partners and MMA Ventures) that provide PPAs. In the EU, there is a stable feed-in-tariff structure that provides the incentives to finance these projects. The environment in Asia is much more varied with manufacturers and even vendors getting involved in the financing in certain cases. Right now, the greatest IRRs are with large utility deals because they are getting done. However, the best potential IRRs are within the residential and commercial marketplace when that business returns.

M.A.: Are U.S. solar firms more of a venture capital undertaking, at this point in time, or is this a myth?

J.C. & J.M.: VCs are still very important as they are still able to provide capital to new solar companies. We will see a shift as companies get awarded capital from the Department of Energy awards and stimulus package funding.

M.A.: How does, if at all, the deal cycle differ in this niche market?

J.C. & J.M.: The deal cycle has been elongated due to lack of capital and decline of market valuations.

M.A.: Given market conditions across the board, how is Lincoln creating and/or benchmarking valuation within the solar sector?

J.C. & J.M.: Lincoln International publishes a quarterly stock index and deal reader in which we track and chart key companies in the industry in order to monitor and adequately understand valuations in this sector.

M.A.: Finally, what is the most challenging aspect of creating and closing deals in the solar sector?

J.C. & J.M.: The solar space is truly a worldwide market, and therefore, deals in this space need to cover a global buyer universe. The challenge for any firm is having the appropriate access to overseas buyers and the ability to complete a cross border transaction. In the middle market, Lincoln International has the strongest international capabilities (substantiated by the fact that over 30% of our deals in 2008 were cross border) and is well-positioned to complete deals in this space.

M.A.: Thank you Jack and John.