The post-mortem reports are coming in droves as SunEdison prepares to file for bankruptcy. There are many diagnoses of the fall of this giant, but the common thread running through all of them is that SunEdison wanted to become the preeminent market force in the solar industry, but lacked the patience to build to that stature without burdening the company with excessive risk. And that risk, largely in the form of over-leverage, has come back to bite them in a big way.
Until the last year or so, it seemed as though SunEdison was the most prescient player in the market. They took advantage of historically low interest rates to use leverage to build and acquire solar assets at an unprecedented pace. Of course, revenue growth could not keep up with the accumulation of what became nearly $12B of debt by 2015.
It was a classic market share play gone awry. By the time they committed to this path, the solar industry was likely not large enough to accommodate the growth expectations baked into their corporate strategy. They had to start acquiring anything and everything, often through massive overbidding for projects, which further cut into their increasingly small margin for error. As a result, they have been hemorrhaging EBITDA since 2012. But, hey, Amazon did the same thing for years. The only difference is that this model does not work in infrastructure companies dealing in hard assets.
Growth at all costs is not a sustainable strategy
When you start on the growth hamster wheel, it is hard to find an opportune moment to get off. In order to maintain the illusion that SunEdison was still a financially sound company with healthy growth prospects, it had to double down time and again on their acquisition strategy, ultimately culminating in the failed attempt to acquire Vivint. That marriage was always going to be an awkward one, but it still lent SunEdison the air of being the most ambitious behemoth in the market, and maybe adding Vivint to the increasingly diverse cauldron of business lines could conjure something greater than the sum of its parts.
But the convoluted amalgam of yieldcos and mergers only widened the breach in the hull. This has all come to a head with the proliferation of recent news that suggests that SunEdison has long been in internal panic mode. The Vivint deal was never consummated, and a nasty lawsuit is on the horizon. The relationships with Terraform Power and Terraform Global are as tenuous as ever, various executives have left (of their own volition or not, who is to say), and there are a number of investigations into the accounting and financial reporting practices at the company.
SunEdison’s debacle is an anomaly, but still serves as a cautionary tale
There is no telling how the bankruptcy proceedings will play out, but it is certainly going to entail a massive sell-off of SunEdison’s assets to pay off creditors. This has already started in India, where they recently announced 450 MW of projects for sale. Whether SunEdison can emerge from the wreckage with anything intact is anyone’s guess. And whether there was actual merit in their growth strategy is also a point of contention. You can add SunEdison to the Abengoa’s of the recent past—cautionary tales in how growing too big, too fast, and with too sprawling and risky of a corporate strategy can lead to truly fantastic collapses.
The naysayers may point to SunEdison as evidence of some underlying weakness in the value proposition of solar for large developers and investors. But when you look closely at the autopsy, you can see clear signs that this giant was destined to fall under the weight of over-leverage, rapid expansion into risky markets, suspect acquisitions, and perhaps a bit of hubris from management. In the backdrop of the sensational demise of SunEdison, companies such as First Solar and SunPower have been excelling in the current market environment.
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