Warren Buffett Suntech (NYSE: STP) Buyout

Brian Hicks

Written By Brian Hicks

Posted April 10, 2013

Is Warren Buffett buying a bankrupt solar company from China? It may be the case, if rumor holds true.

Amid speculation that billionaire investor Warren Buffett may be interested in acquiring bankrupt Chinese company Suntech Power Holdings Co. Ltd (NYSE: STP), stock for the company surged 29 percent.

Suntech’s stock has been trading low since the company defaulted on a $541 million bond repayment plan. An unidentified source within Buffett’s MidAmerican Energy Holdings Co. is the source of the rumor, but until this is verified, it will remain just that: a rumor.

You may be asking yourself what Buffett would want with a potentially defunct company that has been heavily subsidized by China Development Bank. There is speculation that Suntech may churn healthy profits again later this year.

Suntech is also no lightweight in the solar sector; it was the largest panel manufacturer in 2011, having doubled production to 2,400 megawatts since 2009.

solar roofIt is especially surprising since Buffett has traditionally embarked on a buy-American investment strategy. But the rumored acquisition is in line with MidAmerican’s interest in renewable projects in California.

MidAmerican is interested in solar because of high photovoltaic demand from the utility sector. The company bought SunPower’s (NASDAQ: SPWR) Antelope Valley Solar Projects for $2 billion in California, according to PV Magazine.

There is little doubt regarding MidAmerican’s thirst for solar, but where Suntech fits into the equation is open for debate. Companies like Suntech receive a heavy amount of support from the Chinese government in the form of credit lines and subsidies.

Through government backing, solar companies were encouraged to expand factories and sell solar panels far below market value—blowing away competition from Japan and Europe.

Survival of the Fittest

The influx of lower-priced panels from China devalued the entire solar industry, with a 23 percent decline in 2012. Now the Chinese government is looking to trim the fat, so to speak, by reducing manufacturing through withholding those coveted subsides and credit lines that many Chinese companies have come to rely on. The government is filtering out the glut of solar products by allowing solar companies to fend for themselves.

Without government support, many Chinese solar producers would have gone out of business long ago. No company can continue to stay in business when manufacturing costs exceed market value. This has been the case with many Chinese companies, and it will be interesting to see which companies will survive.

The central government’s lack of response to one of its top-producing companies is a sign that an impending purge is on the horizon. Suntech was once top of the Chinese solar industry, but the company has found itself in trouble with no sign of respite from Chinese officials.

And now with the rumor that Buffett may buy Suntech, the government will avoid helping its once-largest solar panel producer.

Getting rid of excessive manufacturing will have an impact not only on the Chinese solar industry but on the entire world market. This could mean a return to standard prices for solar panels in the long-term, but with so many products already on the market, the damage has already been done. It will be another year before cheaper panels will mostly vanish from the marketplace.

But the solar industry is expected to grow in 2013, and Buffett’s rumored purchase of Suntech could have positive implications on the market in the coming years.

The consolidation of Chinese companies is no different than what European solar manufacturers had gone through when governments could no longer afford to provide subsidies and tax incentives.

Top Solar Contenders

Despite government support, Chinese companies have been hit hard by the product glut and struggling solar companies in Europe.

Yingli Green Energy Holding Co. (NYSE: YGE) is only worth mentioning because the company is set to take Suntech’s place as the world’s largest manufacturer based on 2012 performance. However, Yingli has incurred high debt and could very well end up in the same boat as Suntech.

Trina Solar Ltd. (NYSE: TSL) is one company doing better than its contemporaries, and it may be another investment interest for Buffett.

But Suntech, Trina, and Yingli are a few of the top 12 companies that have received over $43.2 billion in credit support from China Development Bank, as reported by Bloomberg.

From an investment standpoint, Chinese companies will be going through troubled times, and it will be hard to determine which companies will make it.

Looking beyond the Chinese solar industry, California-based SunPower (NASDAQ: SPWR) is one of the top solar companies on the market—providing solar panels to residents, businesses, government facilities, and power plants.

First Solar (NASDAQ: FSLR) is another solar company with a solid reputation. The company has a fast payback rate, and it is known for providing competitive panels on the market.

Through development and research, the company managed to price its panels at less than one dollar per watt. The company has won consistent awards in using cadmium tellurium (Cd-TE) panels. Crystalline panels are considered more efficient, but the company remained with Cd-TE—managing to turn an inferior product into a cost-effective avenue.

The American solar market is faring a bit better, thanks in part to cheaper panels, competitive leasing rates, and growing demand among consumers and utility companies.

For investors, however, investing in solar is still a risky venture, despite projected growth in 2013.


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