What is the outlook for Vivint Solar (VSLR) now that it has backed out of a deal to be acquired by SunEdison (SUNE)? Goldman Sachs says it is not good. However, the bank may be at least partly responsible.
On Wednesday, Goldman Sachs reinstated coverage on the Utah-based renewable energy company and issued a Sell rating with a $3 price target, citing operational and liquidity problems as reasons for the rating. (Shares of Vivint have been trading between $3 and $5 this month and closed at $3.46 Wednesday.)
SunEdison announced plans to acquire Vivint in July, with the initial sticker price being $2.2 billion. The deal immediately raised questions about SunEdison's ability to complete the transaction, given its own financial concerns. Terms of the deal were revised in December and Vivint's shareholders approved of the transaction in February. When SunEdison failed to consummate the deal in the days after Vivint's approval, Vivint terminated the agreement. It is now suing SunEdison for willful breach of contract.
"In our view, the operational disruption of the failed acquisition by SunEdison has significantly weakened Vivint's competitive positioning," Brian Lee of Goldman Sachs wrote in Wednesday's note.
The bank suspended coverage of Vivint when the deal with SunEdison was announced on July 20, 2015, according to data compiled by Bloomberg. Goldman Sachs' last rating on Vivint was on Jan. 6, 2015: It issued a Buy rating with an $18 price target when the stock was trading around $8.50. (Goldman Sachs declined to provide a copy of the note as it was more than three months old.) Of course, it is not uncommon in an investment bank that the research department would cover companies that are doing business with other departments of the bank.
In his review of Vivint, Lee acknowledged a Wall Street Journal report from earlier this month, which said that lenders "balked" at providing the loans necessary to complete the transaction. Among the lenders listed in the report was Goldman Sachs.
Goldman -- along with other lenders -- had committed to provide bridge loans totaling $1.46 billion to SunEdison and its yieldco, TerraForm Power (TERP), for the completion of the deal, according the documents Vivint filed in its suit against SunEdison in Delaware's Court of the Chancery.
To be sure, given SunEdison's legal and operational problems, the lenders had cause to be less willing to lend. Shares of SunEdison have fallen 92% since the deal was announced in July. It also was sued by Appaloosa Managegment for breach of fiduciary duty to TerraForm Power on the grounds that the deal was unfair to the yieldco and that SunEdison exerted undue control over the yieldco's board and management. (Appaloosa has a 9.5% stake in TerraForm Power.)
As a result of the failed deal, however, Lee wrote that Vivint has likely seen "sales defection" to its peers and that it could take time to reverse that trend.
In the meantime, Lee says that it is likely that Vivint will raise $100 million in equity in the second half of 2016, which would of course, be dilutive. In Lee's view, asset sales or upsizing Vivint's existing credit facility could be better options. Additionally, Vivint could receive "substantial monetary damages" from its suit against SunEdison, which could enhance Vivint's liquidity but there is too much "uncertainty" around the litigation at this point.
"Uncertainty" that is due, in part, to Goldman Sachs.