David Tepper (Trades, Portfolio)’s Appaloosa Investment Limited Partnership added 200,000 shares to its holding of TerraForm Power (TERP, Financial), raising its position in the company to 7.6 million, it disclosed Tuesday.
The associated regulatory filing also included a letter from Tepper’s company placing additional pressure on TerraForm’s board to reconsider a deal between its sponsor SunEdison (SUNE, Financial) and Vivint Solar (VSLR, Financial), which he believes would destroy shareholder value.
“Notwithstanding the assurances you say you have received from the Seller’s (i.e., SUNE’s) attorneys, we do not believe that the Purchase Agreement between TERP and SUNE reflects a valid, arm’s length commercial arrangement,” James Bolin, senior partner at Appaloosa Management, said in the letter.
Under the terms of the agreement, SunEdison, the world’s largest renewable energy development company, would acquire Vivint Solar, a U.S. provider of residential solar systems, for $2.2 billion in cash, stock and convertible notes. As part of the agreement, SunEdison, which regularly sells projects to TerraForm Power, an owner and operator of clean energy assets, would pass its current portfolio of rooftop solar products onto one of TerraForm’s subsidiaries.
"TerraForm Power is excited to expand our residential solar portfolio with the acquisition of Vivint Solar assets, including 523 MW, which will accelerate our growth in this segment," said Carlos Domenech, TerraForm Power's chief executive officer. “With immediate accretion to our stockholders at initial drop down and the predictable flow of drop down assets into the future, we see this acquisition as creating substantial value for our stockholders."
But some shareholders, including Tepper, have questioned the value of the portfolio and whether the plan, forged July 20 and expected to close in fourth quarter 2015, benefits only SunEdison.
“SUNE clearly covets the Vivint development operations that it needs to offset defects in its own capabilities and market position, which it has ceded to competitors such as Solar City, SunRun, and others,” Tepper wrote in the letter. “The Purchase Agreement thus facilitates SUNE’s acquisition of the capabilities it lacks, and forces TERP to acquire inferior rooftop assets at an inflated price in order to subsidize the cost of the SUNE/Vivint merger.”
Tepper publicly launched his campaign against the deal on Dec. 2, when he disclosed a 7.4 million share holding he had acquired through most of November in a 13D filing. Appaloosa wrote in the filing it had sent a letter to TerraForm’s corporate governance committee on Nov. 25 urging it to investigate certain transactions and the company’s relationship to SunEdison. It also accused the company of delaying disclosure of a board dispute leading to the resignation of four board members on Nov. 20, two of whom allegedly stated they could no longer “protect the interests” of shareholders.
Founder of the $23.5 billion hedge fund Appaloosa Management, Tepper’s Palomina Fund was said to return 9.7% for the year through October, and 25.09% on average annually since inception in 1994, according to data from HSBC. Appaloosa’s top six positions all show estimated gains from their average purchase price, with two – HCA Holdings Inc. (HCA, Financial) and Goodyear Tire & Rubber Co. (GT, Financial) – up more than 100%.
Tepper, who seldom becomes involved in activist situations, said his stake in TerraForm, representing 9.5% of its outstanding shares, “surely demonstrates our commitment and belief that the company can regain its balance.”
TerraForm’s stock price popped 7.2% on Monday, to close at $8.66 per share. The price is still down almost 72% year to date, with a decline beginning roughly coincident with the announcement of the merger. SunEdison shares declined 1.99% for the trading day, and fell 82% year to date, to close at $3.44 per share.
Financially, TerraForm Power had operating revenues of $163.3 million in the third quarter, up from $53.6 million the corresponding quarter last year. Net income increased to $2.4 million, from a net loss of $1.9 billion last year, while it raised its dividend 55% from its starting payout a year ago to $1.40 annually.
One guru, Baron Funds, mentioned TerraForm in its third-quarter letter shareholders, saying its strong dividend structure partially attracted it to the stock in the fourth quarter. Though initially upbeat about the company, Baron Funds ultimately chose to sell in the third quarter.
“TerraForm Power Inc. is a ‘yieldco,’ a dividend growth-oriented company that bundles renewable long-term contracted operating assets to generate predictable cash flows… 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,” the company said in its third quarter letter to shareholders.
“Although we believe in the secular drivers behind the growth in renewable energy demand, we chose to exit our position in the company.”
Tepper’s team bullet-pointed several more arguments against the deal SunEdison-Vivint deal on Monday. Read the full letter below:
Mr. Brian Wuebbels, CEO
TerraForm Power, Inc.
7550 Wisconsin Avenue, 9th Floor
Bethesda, MD 20814
Dear Mr. Wuebbels:
Thank you for making time to meet with us briefly at the Morgan Stanley YieldCo Conference last Wednesday. As noted in the meeting (and in our previous letter), Appaloosa has a considerable investment in TerraForm Power, Inc. (“TERP”, or the “Company”), which surely demonstrates our commitment and belief that the Company can regain its balance. Such normalization can only occur, however, with independent leadership that is determined to honor the Company’s mandate (as again stated in its most recent 10-Q) to “acquire, operate and own renewable energy generation assets serving utility and commercial customers that generate high-quality contracted cash flows”. Once again, this will require an arm’s length relationship with SunEdison (“SUNE”) and adherence to proper (and lawful) governance procedures and principles.
As discussed, we view the proposed Vivint transaction as just one (albeit the most egregious) breach of these governance standards. Notwithstanding the assurances you say you have received from the Seller’s (i.e., SUNE’s) attorneys, we do not believe that the Purchase Agreement between TERP and SUNE reflects a valid, arm’s length commercial arrangement. We thus question its legal enforceability for the following reasons:
| Â | • | In the first place, the Agreement was struck between an affiliated subsidiary and its controlling parent. Under well-established Delaware law, we believe the validity of this Agreement (and the conduct of the officers and directors who approved it) would be evaluated under the entire fairness doctrine, not the business judgement rule. Thus, the burden of proof as to fairness falls on the Company’s Board of Directors, who must establish that the Purchase Agreement was fair to TERP from a commercial standpoint, and that the procedures by which it was adopted were also fair. |
| Â | • | Second, the basic terms of the transaction are by no means fair to TERP. The effective purchase price, approaching $1.84 per watt including transaction costs, is high by market standards of last July and even higher by today’s standards. As we’ve already noted, acquiring these assets (particularly in such massive a quantity) deviates from TERP’s business mandate and serves to benefit only SUNE. SUNE clearly covets the Vivint development operations that it needs to offset defects in its own capabilities and market position, which it has ceded to competitors such as Solar City, SunRun, and others. The Purchase Agreement thus facilitates SUNE’s acquisition of the capabilities it lacks, and forces TERP to acquire inferior rooftop assets at an inflated price in order to subsidize the cost of the SUNE/Vivint merger. |
| Â | • | Additionally, the basic terms of the Purchase Agreement are certainly not market-based or representative of an arm’s length transaction. TERP is burdened with specific performance provisions in the document and is not permitted the benefit of significant seller representations, fiduciary review, break-up fee, or other protective provisions that might normally be negotiated between an unaffiliated buyer and seller. |
| Â | • | Moreover, the obligations under the Agreement are not mutual. SUNE/Vivint is held to few, if any, standards of performance and is even permitted to fail in delivering the contracted assets at the effective date. Instead, the seller (i.e., SUNE) can issue an unsecured note to TERP as a substitute for any deficiency – technically, in an amount up to 100% of the purchase commitment. Based on public information, it appears that this provision will be invoked. Therefore, the below market interest rate on the note (8% vs. a 15% all-in yield on a note issued to Goldman Sachs at the time of the deal, and an average yield of more than 20% on SUNE’s bonds at current market prices) and SUNE’s precarious financial position become material contractual defects. |
| Â | • | More to the point, given SUNE’s over-extended financial condition, it is doubtful that TERP will ever be able to collect on the note and receive equivalent value for its purchase. |
The Vivint transaction poses a serious threat to the Company’s prospects and should be vigorously resisted by you, as CEO, and the Governance and Conflicts Committee, as the unaffiliated shareholders’ advocate. We look to the both of you to fulfill your obligations and expect to see clear evidence of the steps you will take toward this end.
Sincerely,
James E. Bolin,
Senior Partner
cc: David Tepper (Trades, Portfolio)
Lawrence Rolnick, Esq.
Peter Blackmore
TerraForm Power, Inc. Board of Directors
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