Swiss industrial giant ABB Ltd (ADR) (NYSE:ABB) surprised markets by announcing a deal to acquire solar-inverter manufacturer Power One Inc (NASDAQ:PWER) for nearly $1 billion in cash. The offer price of $6.35 per share was a huge premium of 57% to Power One Inc (NASDAQ:PWER)’s market price, and it was natural for the stock to get a boost after the deal came to public light. This is in contrast to the overall trend for solar stocks as of late: the Claymore/MAC Global Solar Index is down 93% since April 2008.
ABB merger details
ABB Ltd (ADR) (NYSE:ABB) expects the acquisition will start contributing to its profits within 12 months. These lofty valuations breathed some life in solar stocks, which seem to be battered beyond recognition. However, the natural question is if ABB’s bet on the solar industry can be generalized for solar panel and module manufacturers.
Much to the chagrin of such companies, ABB Ltd (ADR) (NYSE:ABB) made it very clear that it has no intentions of getting into the low-value line of business, even though it believes the solar market will see tremendous growth in the future as electricity costs rise.
Unlike solar panels, where Chinese innovation is more than apparent, solar inverters are complicated pieces of technology and are difficult to replicate. This means margins are higher and thus valuations are also much better.
ABB is making an investment on the solar industry with this deal, which bears significant risks (mainly related to competition/pricing and grid parity/subsidies) but also great opportunities (photovoltaic inverters annual volume growth of more than 10%, penetration in Asia, aftermarket growth).
Photovoltaic inverters have been a strategic focus area for ABB in recent years and while it has looked to expand previously on an organic basis, this deal provides a more significant footprint relative to ABB Ltd (ADR) (NYSE:ABB)’s current sales.
Apart from Power One Inc (NASDAQ:PWER) (in which the rally has played out), the beneficiaries of the transaction are likely to be companies such as Enphase Energy Inc (NASDAQ:ENPH) and Cree, Inc. (NASDAQ:CREE) which also benefit from high barriers to entry. The industry is led by SMA Solar Technology AG – a German company – but has enough space for newcomers and small companies.
Even after the major boost recently, Power One Inc (NASDAQ:PWER) trades at a price-to-earnings multiple of just 18. On the other hand, Enphase Energy Inc (NASDAQ:ENPH) is a small player in the space with a market capitalization of $239 million. The company sells its products through OEM’s, distributors as well as directly to installers. Enphase Energy Inc (NASDAQ:ENPH) is a growth-phase company and though it does not make profits as of yet, it has been expanding its reach into solar-panel manufacturers and installers.
While both Power One Inc (NASDAQ:PWER) and Enphase are inverter manufacturers – there are some differences between the two. For starters, Power-One offers some of the best free cash flow metrics in the space (whereas Enphase Energy Inc (NASDAQ:ENPH) had an operating cash burn in 2012 and is likely to again have one in 2013) as well as a cash balance that was 54% of market cap in recent days.
Enphase Energy Inc (NASDAQ:ENPH) is clearly a much less mature business, but offers its own positive attributes: the industry’s leading micro-inverter platform, a commanding share in the U.S. rooftop market, and much faster than average top-line growth.