Solar Merger-Venture Shenanigans (SOLF, SHCAY, STM, AMAT, JKS, CDXS)

The ever-entertaining solar PV sector provides more than its share of fun today. First, Solarfun Power Holdings Co. Ltd. (NASDAQ:SOLF), a Chinese solar PV company making crystalline wafers, cells, and modules, has ‘almost’ merged with South Korea’s Hanwha Chemical in a deal valued at $370 million for half of the company.

At the same time, Sharp Corp. (OTC:SHCAY), one of Japan’s largest solar cell makers, Italy’s Enel, and STMicroelectronics N.V. (NYSE:STM) have formed a joint venture called 3Sun to jump into the thin-film solar PV market. This at a time when Chinese thin-film maker Trony Solar withdrew its IPO due to unfavorable market conditions, and semiconductor equipment maker Applied Materials Inc. (NASDAQ:AMAT) was downgraded by UBS from ‘buy’ to ‘neutral’ following its firing of 500 employees and the decision to eliminate its solar wafer-specific equipment line.

First, the Solarfun deal. Hanwha will buy nearly 36.5 million ordinary shares of Solarfun for about $78 million and about 122 million more shares owned by two companies controlled by Solafun’s chairman, valued at about $290 million. In exchange, Hanwha gets 49.99% of Solarfun, three of seven board seats, and Solarfun’s existing management. The deal puts a value on Solarfun of about $740 million, about $80 million higher than its market cap even with today’s 12% jump in the share price.

With prices for crystalline PV cells falling as efficiencies in photoelectric conversion increases, it’s a bit of stretch to see how Hanwha’s investment will pay off. Solarfun will have to go after the low-margin end of the market and hope to make its profits on volume. That’s never a good place to start from.

Second, the Sharp/Enel/STM joint venture is another head-scratcher. Thin-film solar faces a serious threat from crystalline PV makers as the costs for crystalline PV has come down and conversion efficiencies for crystalline have risen. The JV does include the deep pockets of Sharp, which may be enough for it to succeed. The new company also plans to function as a vertically integrated operation, making the cells at an STM plant in Italy and eventually getting into the independent power producer market, probably starting with Enel in Italy. It’s an ambitious plan, and it could take some time for it to pay off.

Third, the story with Trony Solar, a failed thin-film IPO, is just another chapter in a dismal year so far for renewable energy IPOs. JinkoSolar Holding Co. Ltd. (NYSE:JKS) and biofuel maker Codexis Inc. (NASDAQ:CDXS) concluded disappointing IPOs, and another solar cell maker, Solyndra, had to withdraw its IPO. Investors have decided that these renewable stocks are just too risky, especially given the slow economic recovery that could reduce government subsidies for renewable energy. Even with subsidies, the timetable for generating a return on investment is very long.

An interesting and entertaining day. So far, Solarfun has set a new 52-week high of $12.30, though it is now trading at around $11 for an 8% gain, near a low for the day, on more than three-times average daily volume before noon.

Paul Ausick