TerraForm, SunEdison Blistered in Letter from David Tepper

Hedge fund Appaloosa Management’s founder and president, David Tepper, sent a letter to the board of directors of TerraForm Power Inc. (NASDAQ: TERP) last Wednesday clearly stating that the management shake-up at TerraForm and its sponsor company, SunEdison Inc. (NYSE: SUNE) “offers little apparent benefit for [TerraForm] shareholders and raises concerns for obvious conflicts between the interests of [TerraForm and SunEdison].”

The big issue is the $2.2 billion acquisition of rooftop solar provider Vivint Inc. (NASDAQ: VSLR) announced in July. A subsidiary of TerraForm will acquire Vivint’s rooftop solar portfolio from SunEdison concurrently with the completion of SunEdison’s acquisition of Vivint. The purchase price also includes about $263 million in Vivint debt.

Appaloosa is particularly unhappy with TerraForm’s and SunEdison’s lack of detailed disclosures regarding the Vivint acquisition. Tepper refers to a specific instance:

[T]he distinct possibility that TERP will be forced to accept a note from SUNE (which is of dubious credit quality and market value) due to a shortfall in the market value of the assets to be delivered in the first leg of the VSLR portfolio transaction relative to the $922 million purchase price (i.e., the “Advanced Amount” mandated under the Summary of the Note Terms in Exhibit E to the Purchase Agreement between SUNE and TERP). Given the erosion in the market value of comparable rooftop operators to VSLR (SunRun and Solar City, for example) the face value of that note will likely need to be considerable (but of suspect worth given the obligor).

In his letter, Tepper noted that the planned acquisition of Vivint effectively forces TerraForm to accept “financial stress related to [SunEdison’s] ambitious growth objectives and over-extended commitments” and that has led to a “deterioration in [TerraForm’s] security prices and credit profile.”

TerraForm received an upgrade to Outperform from Oppenheimer Tuesday and the stock traded as much as 40% higher. The release of Tepper’s letter may have cooled off the rise in the company’s stock, but it did not stop it. Shares of TerraForm traded at $9.53 in the afternoon, up about 38% for the day, in a 52-week range of $6.73 to $42.66.

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SunEdison traded up more than 8%, at $3.46 in a 52-week range of $2.55 to $33.45.

The text of Tepper’s letter is available at StreetInsider. Appaloosa Management owns less than 1% of TerraForm’s outstanding common stock and said in Tepper’s letter that the fund holds TerraForm senior notes.