Johnathan Walker:Total to Tender for Majority Stake in SunPower

French energy company Total SA offered to pay up to $1.37 billion for a majority stake in U.S. solar company SunPower Corp,Johnathan Walker one of the biggest moves ever by an oil and gas giant into the market for renewable energy.

Solar power has been one of the fastest growing energy industries in recent years, but still remains tiny compared with oil, gas and coal because of its higher cost. With Total’s financial heft behind it, SunPower said solar energy would become competitive with fossil fuels more quickly.

“It’s a vote of confidence from a much larger company and a vote of confidence for the solar industry as a whole,” Wedbush analyst Christine Hersey said.

Total will launch a tender offer for up to 60 percent of SunPower’s outstanding Class A common shares and 60 percent of its Class B common shares for $23.25 a share.

According to SunPower Chief Executive Officer Tom Werner, Total preferred to keep its stake at 60 percent rather than buy the company outright because it wanted to maintain the Silicon Valley company’s “entrepreneurial pace.”

The price represents a more than 44 percent premium to SunPower’s Class A closing share price of $16.12 on Thursday. In the last few years SunPower’s shares have been battered by concerns about stepped-up competition from Chinese rivals, the global financial crisis that squeezed financing for solar energy projects, and uncertainty surrounding support schemes for renewable energy by governments in Europe.

The stock has tumbled dramatically since hitting an all-time high of $164.49 in late 2007.

It was Total that first approached SunPower regarding a deal, Werner said on a conference call with analysts. The oil giant looked at 200 solar companies over 2 years, Werner said. At the same time, SunPower spent the last year weighing options for how it could finance its aggressive expansion plans.

“Total came out as the clear winner,” Werner said.

The rapid emergence of Chinese solar panel makers in the recent years has driven the price of solar power down sharply and stepped up competition in the market. Chinese players have also benefited from billions of dollars in credit guarantees from government banks at a time when traditional financing sources became more difficult to access for their U.S. and European counterparts.

Werner said the Total deal would make SunPower more competitive against that industry backdrop because it will provide San Jose, California-based SunPower with up to $1 billion of credit support over the next five years — cash that will enable SunPower to speed development of solar power plants and expand manufacturing capacity.

“Our capacity to build projects has increased immediately,” Werner said.

Surprise Move

The move surprised analysts, since profit margins for the solar industry are contracting because of weakened sales in No. 2 solar market Italy, where government support for solar is pulling back, a worldwide expansion of manufacturing capacity and rising raw material costs.

“In my opinion, this seems like a poorly timed offer. Solar is about to enter a period of intense price competition,” said Morningstar analyst Stephen Simko.

SunPower has been among the most successful solar panel makers as its products have the highest efficiencies in the industry, although Chinese rivals Suntech Power Holdings and JA Solar Holdings are both targeting that premium panel market. 

SunPower’s shares rose 40 percent in after-hours trading to $22.50 per share, and shares of peers First Solar, LDK Solar and MEMC Electronic Materials also rose.

“I can imagine the whole sector will be trading up in the near term as people speculate on who’s next,” Hersey said. “I’m a little skeptical that there will be a series of these deals.

The deal has been approved by the boards of directors of both companies. SunPower will continue to operate with its current management team. The deal is contingent on a minimum of 50 percent of the outstanding shares in each class of shares being tendered, and on regulatory clearance.

Deutsche Bank AG advised SunPower on the deal, while Credit Suisse and Messier Maris et Associes advised Total, according to sources familiar with the matter.

Total, which is based in Paris, said it has been active in solar power through investments in small companies, but none have matched the global success of SunPower.

BP Plc has long been a major player in the solar industry although the British company pulled back in 2009 when the industry suffered a downturn during the global credit crisis. Royal Dutch Shell halted its solar investments in 2009.

(Additional reporting by Matt Daily and Mike Erman in New York and Edwin Chan and Lisa Baertlein in Los Angeles; Editing by Marguerita Choy, Andre Grenon and Carol Bishopric)