Canadian Solar (CSIQ) – Going Private – 26% Upside

Current Price – $14.69

Going Private Offer – $18.47

Upside – 26%

Expiration Date – TBD

Going Private Proposal

This idea was shared by Neo.

 

Canadian Solar is a global solar panel producer. In addition to being a manufacturer of solar PV modules and provider of solar energy solutions, CSIQ also have a geographically diversified pipeline of utility-scale power projects.

In Dec 2017, Canadian Solar announced that its BoD received a preliminary, non-binding going private proposal from its Chairman, President and CEO, Dr. Shawn Qu, who holds ~23% of the shares outstanding, to acquire the rest of the company at a 7% premium ($18.47/share) relative to pre-announcement price.

The deal would be financed through a combination of debt and equity. Special committee was quickly formed to consider the proposal.

 

Long silence on the proposal

Policy changes in the global solar market caused high uncertainty and potentially limited investors’ interest in financing similar transactions. This is likely  the reason for the delay in any progress (at least there not been any announcements) re. the going private transaction so far.

From Q4 2017 call:

Entering into 2018, we have seen a slowdown in solar module demand, probably caused by both seasonal and policy factors. On the seasonality side, winter is traditionally a slow season. On the policy side, the Section 201 tariff decision by President Trump, the pending ruling on the AD/CVD petition and the safeguard case in India all caused turmoil in the solar market. We have seen price movement along the value chain, first started in solar modules, then trickled down to solar cell, wafer and polysilicon. The recent auction results from China’s Top Runner Program further demonstrated the cutthroat competitions in the Chinese market expected in coming months.

From Q1 2018 call:

Despite our encouraging results, we hit a slowdown in a solar module demand in the first quarter, partially due to the typical seasonality. However, the Section 201 import duty decision by the U.S. government also had a major impact. In addition, many solar project developers in India were waiting for definitive decision from anti-dumping treaties launched against solar modules from China and a safeguard case similar to that in U.S.

And finally China’s new solar policy affected on May 31st:

This not only sets the market up for an oversupplied second half of the year, but since China is such a large driver of global demand, it also suggests that suppliers need to slow down manufacturing investments,” said Jones, “lest they extend the oversupply cycle beyond 2018

The chairman’s intentions to take the company private are still solid, he might simply be waiting for a better timing opportunity after the industry wide headwinds take the toll on company’s share price, potentially allowing for a lower take-out offer or at least increasing the probability that shareholders will approve the transaction.

 

Catalyst

The silence was interrupted in Aug 2018 when Lion Point Capital, an activist fund co-founded by Didric Cederholm, filed a 13D after accumulating a ~6% stake believing that the company was trading at a steep discount to its intrinsic value and that there are significant opportunities to unlock shareholder value.

Additionally 13D stated that:

Following the public announcement of the Privatization Proposal, Lion Point had conversations with several large financial and strategic institutions that expressed an interest in potentially providing financing for the Privatization Proposal, and Lion Point subsequently submitted a preliminary term sheet, subject to due diligence and certain other conditions being met, including the participation of certain third party financing sources, to the Chairman offering to provide a 5-year financing package of up to $250 million to i) backstop the sources of funds arranged by the Chairman for the Privatization Proposal and ii) to make additional funds available to increase the per Share price of the Privatization Proposal, if necessary. Lion Point has also indicated to the Chairman that, based on its discussions with certain financial institutions and strategic investors, it may be able to significantly increase the size of the offered financing subject to governance, diligence and other conditions.

Furthermore, it was also revealed in the 13D that in addition to the stake Lion Point bought, they also entered into various contracts including swap agreements with several financial institutions granting them economic exposure to an additional ~6% notional shares at an average of slightly under $15/share, bringing their total economic exposure in Canadian Solar to ~12% of shares outstanding.

A week later company also issued press release that going private plan is progressing:

Dr. Qu has engaged financial advisors and is in discussions with potential equity partners and debt financing sources. The Company has entered into confidentiality and standstill agreements with Dr. Qu and several potential equity partners and provided them with access to information about the Company. The Special Committee has given Dr. Qu and the potential equity partners until the end of September to complete their due diligence on the Company.

Timing to completion is uncertain, however indication that due diligence needs to be finished by the end of September, seems to suggest that some kind of announcement can be expected shortly afterwards. Lion Point swap expiration dates range from Feb 2021 to Jul 2023, so they seem to expect longer period before closure.

Given the spread, even if it takes 1 year for the deal to close, one could realize a satisfactory return of 26% (assuming no changes to the offer).

 

Risks

• Proposal is non-binding and could also be adjusted lower given the solar panel market downturn and current CSIQ share price, although Lion Point letter suggest that upward offer revision is also a possibility.

• Financing has not been arranged yet, although $250m backstop facilities mentioned by Lion Point could finance up to 1/3 of the deal. Latest company press release also mentions ‘equity partners’ being involved in due diligence.

• It is not entirely clear what is Lion Point play here – if they are supportive of going private transaction by the Chairman why choose to go public with their announcements instead of discussing this with the company in private. Also not clear if Lion Point would agree to sell at $18.47/share or whether they will push for higher offer.

• Due to industry headwinds described above Q3 results are likely to be lackluster, which might negatively affect the share price.