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Telephone Briefing
Investment Opportunities in the German Solar Industry
29 March 2012
Dr. Ulrike Binder Dr. Marius Boewe Thomas Schubert, LLMPartner Partner AssociateTel. +49 69 7941 1377 Tel. +49 211 86224 233 Tel. +49 211 86224 [email protected] [email protected] [email protected]
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Content
• Market Overview Germany
• Investment Structures
– Cooperation
– Acquisition / Purchase of Shares
– Capital Increase– Capital Increase
– Asset Deal – General
– Distressed Acquisition (before/after Opening of Insolvency)
• Regulatory
– Subsidies
– Renewable Energy Act / Feed-In Tariffs for PV
2
Market Overview Germany
• The German solar market (manufacturing, project development, operation) is consolidating
• Driving factors are:
– Over capacities in production
– Intense price competition from Asian manufacturers– Intense price competition from Asian manufacturers
– Decline in European market demand
– High leverage of many companies
– Changes in German feed-in scheme combined with uncertainty regarding future reductions
• Insolvencies have occurred: Solar Millennium AG, SOLON SE, Solarhybrid AG (last week)
3
Market Overview Germany
• Reasons for investing in established German solar companies:
– Well-known brand names
– Good market access
– Broad R&D resources and know-how
– Advanced technology– Advanced technology
– Acquisition at reasonable prices
• Investments of Asian manufactures have occurred: LDK/Sunways, Microsol/SOLON
• So far: Increase in installed capacity in Germany and increasing share of renewable energy to total energy consumption
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Market Overview Germany –Development of Installed PV Capacity in Germany
16.000
18.000
20.000
22.000
24.000
26.000
16.000
18.000
20.000
22.000
24.000
26.00024.820 MWpElectricity supply PV (GWh)
Installed capacity PV (MWp)
5
19.0
00
11.6
83
6.5
83
4.4
203
13 556 1.2
82
2.2
20
3.0
75
1 2 3 6 8 11
16
26
32
42
64
76 162
0
2.000
4.000
6.000
8.000
10.000
12.000
14.000
16.000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
[MW
p ]
0
2.000
4.000
6.000
8.000
10.000
12.000
14.000
16.000
[GW
h]
Source: BMU-KI III 1 according to Working Group on Renewable Energy-Statistics (AGEE-Stat);
1 GWh = 1 Mill. kWh; 1 MW = 1 Mill. Watt; image: BMU / Bernd Müller; as at: March 2012, all figures provisional
Market Overview Germany –Investments in Germany (2011)
Total: approx. 22.9 Bill. Euro
Hydropower
Biomass
(heat)
Geothermal
energy *960 Mill. Euro
880 Mill. Euro
70 Mill. Euro
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energy *
Solar thermal
energy
Biomass
(electricity)
Wind energy
* Large plants and heat pumps; deviations in the totals are due to rounding;Source: BMU-KI III 1 according to the Centre for Solar Energy and Hydrogen Research Baden-Wuerttemberg (ZSW); as at: March 2012; all figures provisional
2,000 Mill. Euro
14,000 16,000
Photovoltaics
[Mill. Euro]
1,050 Mill. Euro
2,950 Mill. Euro15,000 Mill. Euro
0 2,000 4,000 6,000 8,000 10,000 12,000
Investment Structures –General Considerations
• Goal of acquisition: Horizontal expansion (increase production capacities) or vertical integration (combine cell production with module manufacturing and EPC business)
• Intensity of integration: Acquisition or cooperation/joint-venture
• What is acquired: Acquisition of shares (share purchase or capital increase) or acquisition of selected assetsincrease) or acquisition of selected assets
• Situation of target : Going concern or distressed situation/ insolvency
• Investments in the German solar market will be mainly strategic investments, high probability that investments are done in a distressed situation of the target company
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Investment Structures –Cooperation
• Setting-up of strategic joint venture to cooperate in production or sale of products
• Forms of joint ventures:
– Contractual joint venture – mere contract to cooperate
– Operational joint venture – setting-up of operative company to pursue
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– Operational joint venture – setting-up of operative company to pursue the combined operations
• Disadvantages of joint ventures:
– Only cooperation but no entire integration
– Limited influence of joint venture partners
Investment Structures –Acquisition of Shares – Purchase of Shares/Takeover
• Investor becomes the owner of an existing company with all its assets and liabilities, brands, customer relationships, existing contracts, employees
• Continuation of business possible
• Majority shareholding required to influence business decisions and take over operational control
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take over operational control
• If target is a listed company, takeover law applies and tender offer to outstanding shareholders may be required
• Majority shareholder exercises control over listed companies indirectly via the supervisory board
• Pooling agreements with other shareholders allow joint control
Investment Structures –Capital Increase
• In a distressed situation, an investment by way of a capital increase strengthens the liquidity and equity situation of the target (fresh money)
• Combination with capital reduction to cover losses possible, results in high dilution of existing shareholders
• Capital increase up to 50% of existing share capital generally
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• Capital increase up to 50% of existing share capital generally possible from authorized capital
– Exercised by management board/supervisory board
– No shareholders involvement
• Higher increase amounts and capital reduction must be resolved by general meeting
• Outstanding bondholders can be forced to convert into shares
Investment Structures –Asset Deal
• Asset deal allows buyer to cherry-pick and to buy (parts of) seller’s business without assuming existing liabilities
• Business to be acquired needs to be defined asset by asset in the purchase agreement
• Assumption of agreements of the seller requires the contractual partner’s consent; if not granted, internal arrangements between
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partner’s consent; if not granted, internal arrangements between buyer and seller possible
• Employees automatically transfer to the buyer with the business
• Joint-liability for tax liabilities of seller
Investment Structures –Distressed Acquisition before Insolvency
• Sale from the target itself, no administrator involved
• Good position to negotiate purchase price
• Care to be taken if opening of insolvency proceedings are imminent:
– Contestability of sales by the insolvency administrator
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– Contestability of sales by the insolvency administrator
– Could make sales agreements void so that assets have to be returned while repayment of purchase price is a normal insolvency claim
• Consequence: Seller’s financial situation must be carefully considered before the acquisition
Investment Structures –Distressed Acquisition in Insolvency
• Advantages:
– No contestability of acquisition
– No joint-liability for tax liabilities of seller
– Transfer of employees, however, with limitation on outstanding liabilities; use of employee transfer companies possible; easier reduction of work force
13
reduction of work force
• Disadvantages:
– Administrator must conduct a bidding process
– Administrator does not give reps & warranties, but sells assets “as is”
• Third party rights (for separation and recovery) might prevent a successful transfer of the sold assets or entitle the seller to reclaim
Investment Structures –Distressed Acquisition in Insolvency
• Particularities to be tackled:
– Possible harm to brand name due to insolvency and interruption of production/operation of business
– Time pressure: If business shall be continued sale is made immediately after opening of insolvency proceedings
– Lack of information: Short time for due diligence
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– Lack of information: Short time for due diligence
– Secured creditors’ rights: Holders of rights for separation and recovery need to be identified and dealt with before closing
• Consequence: Acquisition generally more complex than regular asset deal, however, the right valuation of existing risks might allow for a reasonable purchase price
• Business may be continued by administrator until sale of assets
Regulatory –Subsidies
• Most companies of the solar industry have received public subsidies (for the acquisition of machinery, land etc.)
• Subsidies are always granted under various obligations:
– Typical obligations are to create and/or to secure a specific amount of employee positions at a specific production site, not to sell or remove the investment goods purchased/produced by the subsidy and to use such goods in a manner as described in the investment plan, not to transfer the property of the company/production site to third parties or not to shut down the production siteproperty of the company/production site to third parties or not to shut down the production site
• A breach of obligation may lead to repayment claim of state
• Repayment may be claimed from company but under specific conditions from the investor
Before investing into or buying equipment from such company, legal assessment is necessary to analyse effect on subsidies
15
Regulatory –Development of Renewable Energy Generation
• The Renewable Energy Act (EEG) was enacted in 2000 to facilitate the development of renewable energy generation in Germany
• The following principles apply:
– Installation operator receives for 20 years a legally guaranteed and defined feed-in tariff for the entire energy generated from its installation, operated on a renewable energy basis exclusivelyon a renewable energy basis exclusively
– Feed-in tariff must be paid by operator of the grid the installation is connected to
– Installation operator is entitled to connect his installation with the local grid at the spot with the shortest distance
– Grid operator is obliged to accept the entire energy fed-in by installation operator and must pay feed-in tariff
– Due to nationwide equalisation scheme, feed-in tariffs are paid by end consumer feed-in tariffs ≠ public subsidies
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Regulatory –Operating Mode of EEG
Operator of renewable energy installation, e.g., windmill
Power grid
Legally guaranteed feed-in ofentire produced energy intopower grid and legallyguaranteed feed-in tariff for20 years to be paid by grid-operator
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Power grid
“feed-in tariff " to be paid by end consumer as renewable energy contribution
End consumer
Regulatory –Feed-In Tariffs / General Principles
• Renewable energy sources (rules for each source):
– Hydropower, wind energy, solar radiation, geothermal energy, energy from biomass, including biogas, biomethane, landfill gas and sewage treatment gas, as well as the biodegradable fraction of municipal waste and industrial waste
• Year of commissioning: Feed-in tariff being in effect in the year of • Year of commissioning: Feed-in tariff being in effect in the year of commissioning will remain valid for 20 years, irrespective of subsequent change of law/tariffs
• Capacity of power plant
• Specification of power plant
• Degression: Feed-in tariffs are reduced periodically the later an installation starts operation, the less is paid
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Regulatory –Contribution of Renewable Energy Sources
4,5 4,7 5,4 6,4 6,77,8 7,5
9,2 10,111,6
14,315,116,417,1
20
10
15
20
25
Share of Total Electricity Consumption (%)
• According to EEG 2012, the following shares shall be achieved: 35%by 2020, 50% by 2030, 65% by 2040, 80% by 2050
19
3,1 3,1 3,7 3,9 4,2 4,5 4,1 4,3 4,7 5,4 6,4 6,7
0
5
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
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Regulatory –PV Feed-In Tariffs are currently under Revision
• PV has been one of “best paid“ renewable energy sources, leading to massive increase of PV installations
• As end-consumer pays feed-in tariffs, legislator intends to avoid massive increase in energy price
• The EEG 2012 aimed to lower the PV feed-in tariffs in comparison to EEG 2009to EEG 2009
• Legislator sees additional need for changes on current mechanism. PV feed-in tariff system as implemented 1 January 2012 is currently subject to legal amendment
• Amendment shall be legislated within the next few weeks
20
Regulatory –Feed-In Tariffs for PV according to EEG 2012 & Changes
• Tariffs for free-standing installations:
– Current regime:
• Land formerly used for economic, transport, housing or military purposes 18.76 ct/kWh
• Free-standing installations and structures which are not buildings and not on arable land 17.94 ct/kWhon arable land 17.94 ct/kWh
– Upcoming regime (draft):
• Free standing installations (no differentiation as under current regime) without arable land 13.50 ct/kWh up to maximum 10 MW installed capacity
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Regulatory –Feed-In Tariffs for PV according to EEG 2012 & Changes
• Tariffs for installations in, attached to or on top of buildings:
– Current regime:
• Up to 30 kW: 24.43 ct/kWh; up to 100 kW: 23.23 ct/kWh; up to 1 MW: 21.98 ct/kWh; above 1 MW: 18.33 ct/kWh
– Upcoming regime (draft):
• Up to 10 kW: 19.5 ct/kWh; up to 1,000 kW: 16.50 ct/kWh; up to 10 MW: 13.5 ct/kWh
• Other relevant upcoming changes (draft):
– Degression: Currently flexible; upcoming -0.15 ct/kWh per month
– Upcoming: Only 90% of energy generated in installations shall be subject to feed-in tariffs (85% in small installations up to 10 kW)
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Business Opportunities?
• Recent development in solar market offers the opportunity to gain market access in short time and at reasonable costs by acquiring existing solar company
• Investments in existing installations might be preferable as already operating installations receive their original tariffs for 20 years
• Even though new installations receive lower feed-in tariffs, lower • Even though new installations receive lower feed-in tariffs, lower prices for components may lead to still profitable investment opportunities in new installations
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For any questions you may have
Dr. Ulrike BinderPartner, FrankfurtT.: +49 69 79 41 1297E.: [email protected]
Foto
Dr. Marius Boewe
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Foto
Dr. Marius BoewePartner, DüsseldorfT.: +49 211 8 62 24 233E.: [email protected]
Foto
Thomas Schubert, LL.M.Partner, Houston/DüsseldorfT.: +49 211 8 62 24 241E.: [email protected]
