Sunrun acquisition of Vivint Solar
Updated: Jan 21
By: Asha Carpenter, Xinrui Wang, Oliver Hulme-Vickerstaf
Overview of the deal
Sunrun (NASDAQ: RUN), a leading provider of residential solar, battery storage and energy services, has closed the acquisition of rival Vivint Solar (NYSE:VSLR), the No. 2 company in the U.S. by market share, in an all-stock deal with an enterprise value of $3.2 billion.
Following the approval by regulators and stockholders of both companies, the agreement reads that Vivint Solar’s shareholders are entitled to get 0.55 of Sunrun common stock for each share held, representing a premium of 10% to the closing price of the target’s stock on July 6. The combined entity will continue to trade on Nasdaq under the ticker symbol RUN, with the stockholders of Vivint Solar owning around 36% of the enlarged company, while those of Sunrun will hold the remaining 64%. The news sent shares of both companies sharply higher.
As Vivint Solar gets integrated into Sunrun over the coming quarters, the buyer expects annual cost synergies of about USD 90 million over the next 12 to 18 months. With the transaction complete, Sunrun solidifies its position as the leader in home solar and energy services across the United States and a top owner of solar assets globally with more than three gigawatts of solar energy and more than 500,000 customers.
Company Details: Sunrun
Sunrun Inc. provides solar energy solutions. The company installs, monitors, and maintains solar panels on homeowner's roofs to supply solar electricity. Sunrun serves customers in the United States.
Headquarters: San Francisco, California, United States
CEO: Lynn Jurich
No. employees: 4,800
Market Cap: $13.18bn
LTM Revenue: $845.7mm
LTM EBITDA: -$52.3mm
LTM EV/Revenue: 19.79x
LTM EV/EBITDA: N/A
Advisor: Credit Suisse
Company Details: Vivint Solar
Vivint Solar is an American energy company operating across 23 U.S. states, previously listed on both the New York and Frankfurt stock exchanges. They offer a variety of sustainable energy solutions for residential usage, with a product range covering solar panels, batteries, energy systems and electric vehicle charging points. Vivint aims to provide a comprehensive service by also supplying, installing and providing maintenance of their customers’ energy portfolios. Their installations for the first 6 months of 2020 reached 99.7MW.
HQ: Lehi, Utah, United States
CEO: David Bywater
No. employees: 2,998
Market Cap: $5.42bn
EV: $3.2bn (as at acquisition close date)
LTM Revenue: $327.4mm
LTM EBITDA: -$82.5mm
LTM EV/Revenue: 18.31x
LTM EV/EBITDA: N/A
Advisor: Morgan Stanley (lead), Bank of America
Short term Upsides
In the time since closing the deal, Sunrun’s market capitalisation has fallen from approximately $17 billion to just over $13 billion. This is likely due to a peak in its share price in early October, which has since dropped by almost 20%. Despite the apparent change in investors’ attitude towards the company since the completion of the merger, their combined market capitalisation is significantly higher than in 2019. Sunrun’s market cap at the end of June 2019 was just $2.4 billion, with Vivint’s at $1.24 billion. Given that both companies have consistently been making net losses in previous years, the far greater scale of the combined entity may help sway investors that were previously deterred by the pair’s unprofitability. Sunrun’s loss for the 3 months ended 30th September has fallen by 24% compared to the prior quarter, and so the expected financial benefits of the integration may already be coming to fruition.
Without accounting for the Vivint acquisition, Sunrun projects its megawatts deployed in Q4 2020 to increase by more than 10% over Q3. Controlling approximately 1 quarter of the US market and placing towards the top of solar asset ownership globally, the view for the remainder of the year is positive as they move forward in a clear market-leading position. With both companies having very similar product offerings and complimentary balance sheets, their integration and subsequent expansion should be relatively smooth. Vivint’s customers now also get access to Sunrun’s existing portfolio of products and solar technologies, presenting opportunities for further expansion and cost savings. This is particularly important considering their struggle to remain profitable in an industry with steeply rising costs. By acquiring their key competitor, Sunrun may be able to push prices in the direction needed to become profitable while simultaneously benefiting from cost synergies.
For now, the two are operating as separate companies, but Vivint is expected to fully merge with Sunrun over the coming quarters. More than 95% of Vivint’s branches are in similar locations to Sunrun’s, meaning they can eliminate one third of physical locations yet immediately gain access to Vivint’s customer base, which grew by 20% in Q3. The U.S. solar industry previously consisted of small companies operating very locally – this transaction therefore massively transforms the market structure and may provide Sunrun with access to forms of financing that weren’t possible before the acquisition. Considering that only 3% of all U.S households in July used home solar and the renewed push towards carbon neutrality in recent months, there is significant scope for Sunrun’s growth going forward.
One of the most significant long-term upsides arising from this acquisition would be the potential for Sunrun to further its expansion into the capacity markets. In 2019, Sunrun was approved to provide capacity to the New England grid, the first time where solar has been a key participant in ISO New England’s annual forward capacity auction. This was enabled largely by the declining costs of battery-packs, which has fallen by 85% since 2010. Sunrun paired battery-packs with solar power in the homes of its customers, storing excess power in these battery systems and releasing them to the grid when needed. For this strategy to be successfully replicated elsewhere, Sunrun requires sufficient density in battery systems in a particular region.
Through acquiring Vivint, Sunrun is able to gain access to a greater number of customers and tap on their batteries or offer batteries to them if they only have solar power installed. Building up customer density will allow Sunrun to enter more capacity markets and increase revenue, with revenue from grid services expected to make each individual rooftop customer about 30% more valuable. Sunrun has already secured contracts with grids in California, Hawaii and New York, and is poised for further expansions.
The other long-term upside would be the cost efficiencies of the new, larger company. Other than the proposed $90 million annual savings in rent and overhead expenses, a key concern for both companies is the shrinking market share of leases and power purchase agreements (PPA) in the American residential solar systems market. Over the years, the cost of solar panels has plummeted from $50,000 to $18,000, making it much more affordable for customers to own their solar systems outright rather than through a lease. New leases and PPA made up just 27% of the American residential solar systems prior to the pandemic.
This acquisition could help to significantly increase scale and efficiency which is necessary to compete in a shrinking market. Combined, Sunrun and Vivint will account for 75% of new residential solar leases each quarter, showing the extent to which Sunrun could dominate the market. This will enable Sunrun to raise capital required for growth more efficiently and negotiate better terms with suppliers. With its increased scale, there is hope that the increased brand recognition of Sunrun will significantly lower customer acquisition costs over time to below its current level of 33% of revenue.
Risks and uncertainties
Despite the fact this deal allows Sunrun to effectively create a monopoly in the U.S. residential solar market, it fails to address the fundamental problem the industry faces – sales and marketing costs. Sales and marketing costs have been rising sharply for years as it becomes harder to find and acquire customers in this saturated market. Although Jurich, CEO of Sunrun, said, Vivint “adds an important and high-quality sales channel that enables our combined company to reach more households,” this deal does little to change the strategy. Sunrun seems to be betting that Vivint Solar's ‘boots-on-the-ground’ sales strategy alongside the strong potential for cross marketing and revenue synergies will help its business – but lack of long-term considerations has been criticised by many investors. The combined company now has claimed a 17% market share - previously a point of worry for some, who thought the deal may not be approved by competition authorities. The deal was of course authorised, but the risks are not completely out of sight - in the future the combined entity could end up dominating the market, eliciting regulators to step in, which may have serious repercussions for the firm’s businesses.
Furthermore, this deal shifts Sunrun's business almost completely to a self-installation focus. This is a big shift for a company that had the majority of its operations as a software solutions company that offered a solution leveraged by thousands of small third-party installers to grow their businesses nationwide. The likely impact of such a severe change is that Sunrun will push out its third-party installation partners by buying Vivint Solar. Now that Sunrun is the biggest installer, third parties will perhaps be more inclined to partner with other software companies rather than sign on with their competition. This will further concentrate the business’ operations within a single service creating concerns of limited diversification for investors, especially at a time when economic outlook is very uncertain.
As well as this, a major uncertainty is regarding the timing of this deal. The acquisition comes at a difficult time for the U.S. residential solar market, with many coronavirus related shutdowns earlier this year and dampened sales figures across the board for the industry. Major installer PetersenDean filed for bankruptcy protection in June - a further testament of the virus’ toll. As the virus grows, the impact on solar installations and consumer demand seems unclear, but one thing is for sure – the longer the impacts of the pandemic last, the more challenging business will become for the newly formed Sunrun.