Management-led offer irks Greenchip
The disappointment on the other end of t he t elephone was obvious: John Cook and Greg Payne, chief executive and vice- president portfolio management respectively, at Greenchip Financial, were upset with the lowball offer to privatize Canadian Solar Inc., a Guelph Ont.based company in which it has an interest. Canadian Solar revealed Monday it has received a non-binding takeover offer from its chairman, Shawn ( Xiaohua) Qu, who is also CEO and president.
To make matters worse, the cash offer — US$ 18.47 a share — for the non-TSX listed company, is the third similar situation the Torontobased firm, which manages a global equity fund, has endured in the past 15 months.
In August, 2016, a management-led group made a final offer to acquire U. S.- listed Trina Solar for US$1.1 billion after making a preliminary offer eight months earlier. Last month, a management group at Nasdaq- listed JA Solar Holdings Co. Ltd. agreed to make a US$ 360 million binding takeover offer — four months after originally indicating its intentions. The transaction has not yet closed.
“This is the third management-driven buyout offer by a Chinese- domiciled, Western- listed solar manufacturer, at a low price and certainly for less what the com- pany is worth,” said Payne, noting that in all three cases, the going-private buyer controlled about 10 per cent of the world’s solar market. Greenchip’s fund is home to a half- dozen solar investments acquired over the past five years.
In the case of Trina, Payne said the sale price (US$11.60 a share) was about twothirds of the value Greenchip has assessed; in JA Solar the offer price (US$7.55 a share) was about one-third of book value. “With Canadian Solar, the offer price was US$18.47. We are in the high US$ 20s in terms of valuation, and we have very conservative assumptions with high discount rates.”
Payne, who admits the recent past hasn’t been the best for solar manufacturers, said that from a long- term perspective, with growing production and with the consolidation of market share by the large producers, better times lie ahead. “This is a much more attractive product to consumers and (affords) the opportunity for margin improvement and long- term stable margins at higher levels,” he said.
In other words, Cook said the market is “dramatically undervaluing” the growth prospects for solar and the solar modular manufacturers. In his view, shareholders didn’t get full or fair value for the one completed transaction and the two that have been proposed. “They are all worth a lot more. It’s very frustrating. We think management is getting away with a price that is too low.” So what’s at work? One possibility is the socalled Chinese discount or the lower multiple Western investors apply to Chinese firms. In such situations, because the Chinese companies don’t receive full value they have a higher cost of capital. Such discounts are not at play in domestic U. S. solar deals: consider the high price Tesla paid for SolarCity.
Other possible causes for the low valuation accorded to solar companies include: the feeling that it’s a commodity business and hence tough to outperform; and the view that solar companies need subsidies to be competitive.
Canadian Solar, which describes itself as one of the world’s three largest solar companies, also has a portfolio of solar power plants. As of Sept 30, those plants had 1,419.5 megawatt peak, a measuring unit for the maximum output of a photovoltaic power plant. Payne said, “that capacity alone is worth more than US$2 billion.”
But al l was not bad Monday for companies in Greenchip’s portfolio: it also owns a stake in Pure Technologies Ltd., which agreed to be acquired by Xylem for an enterprise value of US$ 397 million. Xylem defines itself as a leading global water technology company. “The price (at US$9 a share) may be hard to justify but the acquirer is paying a premium for a takeout,” said Payne.