December 1, 2015 / 5:56 PM / 3 years ago

Appaloosa questions TerraForm Power's Vivint deal

(Reuters) - Hedge fund Appaloosa Management LP said SunEdison Inc yieldco TerraForm Power Inc’s proposed purchase of residential solar assets from SunEdison represented a change in TerraForm’s business model and put shareholders at risk.

Vivint Solar technicians install solar panels on the roof of a house in Mission Viejo, California, October 25, 2013. REUTERS/Mario Anzuoni

SunEdison has agreed to buy rooftop panel installer Vivint Solar for $2.2 billion. As a part of the deal, TerraForm Power would eventually buy Vivint’s residential solar rooftop portfolio for $922 million.

SunEdison created TerraForm Power, and another so-called yieldco, TerraForm Global Inc, to hold solar and wind power projects that it sold to them.

Yieldcos have long-term agreements to sell power to utilities, giving them stable cash flows. But these dividend-paying units depend on the transfer of assets from their parents to increase payouts.

The Vivint acquisition marked an “unfortunate departure” from TerraForm Power’s business model, Appaloosa President David Tepper said in a letter to TerraForm Power’s board.

The deal, he said, appeared to serve the sole purpose of promoting SunEdison’s desire to buy Vivint’s operating assets, rather than enhancing the value of TerraForm Power’s holdings.

Tepper said there was a “distinct possibility” TerraForm Power would be forced to accept debt of “dubious credit quality” from SunEdison if the Vivint deal went through.

TerraForm Power’s shares, which have been volatile for the past few months, rose as much as 33 percent on Tuesday - their biggest single-day gain in more than a year.

The stock jumped 20 percent in premarket trading, before the release of Tepper’s letter, after brokerage Oppenheimer raised its rating on the stock to “outperform.” Oppenheimer said the stock was undervalued and provided a buying opportunity.

“I think (TerraForm’s) management under-appreciated the pushback that they are going to receive from their primarily utility-oriented shareholder base,” Avondale Partners analyst Michael Morosi told Reuters.

“The diversification into residential for TERP is viewed as a more negative than positive by TERP’s existing investor base.”

Wall Street has been questioning the ability of heavily indebted SunEdison to complete the deal ever since it was announced in July.

Analysts and investors say SunEdison has tried to grow too quickly through acquisitions it couldn’t afford. Apart from Vivint, the company is also in the process of buying wind power plants from Invenergy Wind for $2 billion.

As of Sept. 30, SunEdison’s debt stood at $11.67 billion - more than 10 times its market capitalization.

The company’s shares were up 6.6 percent at $3.40 on Tuesday. Up to Monday’s close, the stock had lost 90 percent of its value since the Vivint deal was announced.

In an unrelated development, two Brazilian companies said on Tuesday that TerraForm Global was pulling out of a $3.45 billion deal to take control of solar projects due to adverse market conditions in the country.

Reporting by Anet Josline Pinto and Sneha Banerjee in Bengaluru; Writing by Sayantani Ghosh; Editing by Shounak Dasgupta and Saumyadeb Chakrabarty

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