Earlier this month, David Tepper (Trades, Portfolio) wrote a surprising letter to the board of TerraForm Power (TERP, Financial), questioning its business decisions and the value of its relationship with SunEdison (SUNE, Financial). After the enquiry of the 9.5% stockholder, TerraForm rocketed up and has appreciated about 35% since.
On Dec. 9, a second more detailed letter followed, and today Tepper followed up with another unusual move: In citing section 220 of Delaware's General Corporation Law, Tepper is demanding the right to look at TerraForm Power’s books. The fund wants to know more about the relationship with SunEdison and specifically wants to know more about the SunEdison Vivint Solar deal, which was recently amended to make it more advantageous for TerraForm. The part of section 220 that allows Tepper to demand this is most likely the following:
(b)”‚Any stockholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose, and to make copies and extracts from:
(1)”‚The corporation's stock ledger, a list of its stockholders, and its other books and records; and
(2)”‚A subsidiary's books and records, to the extent that:
a.”‚The corporation has actual possession and control of such records of such subsidiary; or
b.”‚The corporation could obtain such records through the exercise of control over such subsidiary, provided that as of the date of the making of the demand:
1.”‚The stockholder inspection of such books and records of the subsidiary would not constitute a breach of an agreement between the corporation or the subsidiary and a person or persons not affiliated with the corporation; and
2.”‚The subsidiary would not have the right under the law applicable to it to deny the corporation access to such books and records upon demand by the corporation.
But it also appears TerraForm will have quite a few options to fight this, and I would expect it to do so because management teams do not generally appreciate meddling in their affairs at this level. In the previous article, I cited a key piece of the Tepper letter (emphasis mine):
Thus, it is obvious that the deterioration in TERP's security prices and credit profile this month results from (among other things): (1) the transmission of financial stress related to its sponsor's ambitious growth objectives and overextended financial commitments; and (2) TERP's incomplete and selective disclosures. TERP's "reliance on third party acquisitions" has little bearing on either of those factors. We note the advertised increase in the number of independent directors on TERP's board and trust that the Corporate Governance and Conflicts Committee (the "Conflicts Committee") will appropriately investigate these and any other related-party transactions to ensure that they are conducted for the benefit of TERP stakeholders.
This is still a key paragraph today. Tepper is concerned TerraForm's board is allowing too much value to be siphoned away from shareholders by SunEdison shareholders, and he wants to stop it from happening in the future by potentially reversing the process through a reversal of the Vivint deal.
His efforts could be lucrative for minority investors riding his coattails. At the same time, it is almost certainly going to be a rough ride. These public battles induce a lot of volatility in the price of shares. Notably, Ron Baron (Trades, Portfolio) chose to exit his stake, citing exactly this problem in the Baron Asset fund shareholder letter:
TerraForm is focused largely on the commercial-scale development of solar and wind power projects. Its stock dropped after the announcement that TerraForm’s parent, Sun Edison, Inc., would acquire Vivint Solar, thereby expanding into the residential solar market. Investors questioned both the strategic aspects of the deal, as well as its $2.2 billion price tag. This contributed to a market-wide reassessment of the unit economics underlying Sun Edison’s solar development plans. Although we believe in the secular drivers behind the growth in renewable energy demand, we chose to exit our position in the company.
Meanwhile, with Tepper now out in full force, TerraForm still isn’t particularly expensive. After the December recovery, it is still trading at a forward dividend yield of 11%. The mean consensus estimate for end of 2016 earnings are about 50 cents per share. That’s not cheap considering the $12 share price, but it is when the mean estimate for a long-term growth rate of 25% is taken into account. On an EV to Ebitda basis, the company is already more affordable at 13x. With $635 million in cash and $260 million in EBITDA, the $2.55 billion in debt seems manageable. Quite a few other notable gurus have stakes in the $1.5 billion market cap company.
