Did solar startup's financial crunch catch the White House napping?

SAN FRANCISCO -- A Bay Area solar manufacturer's abrupt retreat last month from an initial public stock offering has analysts questioning President Obama's use of the company as a showcase for federal investments in renewable energy.

Solyndra Inc. enjoyed a national spotlight when Obama visited the company's Fremont headquarters in May to herald it as an example of the federal stimulus at work. The president saluted the solar-panel maker, which received a $535 million federal loan guarantee, as the kind of business that will help the U.S. economy turn the corner (E&ENews PM, May 26).

But the reality is Solyndra has been hemorrhaging cash and decided last month to pull back from an initial public offering (IPO) in favor of raising another $175 million from private investors. That brings its total investment from venture capitalists to $1.1 billion, said Shyam Mehta, a senior analyst at GTM Research.

Solyndra had intended to raise about $300 million through the IPO, but investors were reportedly wary about the $558 million the company had lost since May 2005. Nervous venture backers looking to see a return pushed the company to go public, analysts said, but the likelihood of a dim showing forced the IPO's cancellation.

Facts about the company's financial picture are relatively easy to uncover. In 2009, Solyndra lost $172 million, according to documents filed with the Securities and Exchange Commission. A year before, losses were $242 million.


But while the decision to drop the IPO surprised few in the financial industry, it may have caught the White House off guard. Why did Obama showcase a renewable energy company that may be headed in the wrong direction? And why is the company promoted by California Gov. Arnold Schwarzenegger (R) as a solar industry poster child?

Mehta has a simple explanation: "Solyndra has the powerful lobbyists in the business. So they get a lot of love from the government."

J. Peter Lynch, president of Salem Financial Inc., also took note of the company's political connections. He added that media attention -- deserved or not -- could leave the impression that the solar industry is headed in the same downward spiral when Solyndra is more likely an isolated business case.

"It certainly makes the politicians look silly and makes me wonder who was advising them," Lynch said. "I think they did not have the appropriate technical advisers or else the government folks were influenced by the company and its backers."

Lynch added that the financial state of the company became clear to him "after a few phone calls." And Eric Wesoff, an analyst with Greentech Media, speculated in a recent column that Solyndra had likely wasted about $3.5 million on the IPO before backing out, which translates into more taxpayer funds down the drain.

"They gave themselves a black eye and had to take $175 million more from their existing investors, likely at onerous 'cramdown terms,'" Wesoff wrote. "Not a pretty picture for investors, for employee morale, or for customers looking for supplier longevity."

Pricey production

Beyond the political repercussions, analysts said the Solyndra situation is a case study of a company whose production costs are off the charts compared with its sales figures. For the nine months ending in October 2009, Solyndra made panels for $6.29 a watt but sold them for $3.42 a watt, according to its SEC filing.

And while that shortfall is expected for a technology startup, Lynch said the solar industry is under pressure to get costs down at a much faster clip. In Lynch's view, Solyndra, which has won awards for its unique cylindrical panel design for rooftops, has to get its production prices down to $2 a watt and sales to $1.50 a watt.

Industry leader First Solar Inc., by comparison, claims it is approaching solar panels at $1 a watt. With Chinese companies also selling cheaper and cheaper panels, that puts an increasing amount of pressure on Solyndra to deliver a more economical product, whether or not it is favored by those in power.

"The problem with Solyndra is that the product ... does not make economic sense," Lynch said. "I am sure investors may have just said 'enough.'"

Solyndra officials say the company needs to increase production of its panels to decrease costs. But with an glut of solar panels flooding the global market and prices falling, Mehta wonders whether the company can sustain its need for cash infusions at such a large scale.

"It's a race between solvency and profitability," Mehta said. "And from Solyndra's point of view, they need a lot of money."

Solyndra says its outlook improving

While the White House declined to comment on its use of Solyndra to tout the stimulus, company officials defended the loan guarantee as having already helped to bring down prices.

Dave Miller, a Solyndra spokesman, said the company has been under an SEC gag order because of its IPO filing since late last year. But now that its restriction has been lifted, Miller said the company will have good news to share with wary investors.

While he did not provide documentation, Miller said the company has been manufacturing its panels at $3.20 a watt over the past few months. He said the federal loan guarantee has helped increase production and lower costs.

As for the IPO, Miller insisted the decision stemmed from simple market dynamics.

"Our investors decided the timing wasn't great," Miller said, citing poor valuations from Goldman Sachs and others on Wall Street of solar firms. "We would expect to do an IPO later, but right now the [$175 million injection] seemed like a better way to go."

Miller added that the $175 million covers the company's "cash and liquidity needs for now," but he could not say for how long.

A trend for solar?

Mehta sees a larger problem presented by Obama's visit just before the IPO cancellation at Solyndra. He says the presidential speech in Fremont, where Obama touched on the Gulf of Mexico oil spill and federal climate change legislation, could mean negative press for the solar industry at the wrong time.

Solyndra's finances, he said, "are not symptomatic of the solar industry as a whole."

"The industry is doing very well," Mehta said, noting that installed solar panels were up by 60 percent in 2008 and almost doubled in 2009. He expects "another big bump" this year, driven largely by growth and subsidies in Europe, naming Tempe, Ariz.-based First Solar, Sharp, Suntech Power Holdings Co. Ltd. and the German manufacturer SolarWorld AG as the most likely to continue profiting in the short term.

"All these manufacturers are doing very well," he said. "There's so much demand."

But Lynch and Aaron Chew, an analyst with Hapoalim Securities USA, have a less bullish view on solar. Lynch wants to see "revolutionary" technologies start to emerge at a faster rate, and Chew said macroeconomic factors like the debt crisis in Europe could hurt solar in the few years ahead.

"There are a lot of clouds on the horizon that have been concerning investors and weighing on the stocks," Chew said. "Barring a brief rally over the last month, most of [the solar manufacturers] have really kind of taken it on the chin."

Chew explained that growing demand has been driven by subsidies in Germany, Italy, Spain and other parts of Europe. But with many of those subsidies set to cascade, and a sovereign debt crisis threatening to spread from Greece to Italy and perhaps beyond, Chew sees the market headed for a potential flop.

"I have a lot of concerns about the sustainability of demand," Chew said. "There's a lot of oversupply in this industry ... a price war is not unfathomable in the near future."

As for Solyndra, Chew said the IPO situation could give opponents of subsidies and loan guarantees "a big hook to hang their hat on" in terms of arguing against them. Chew added that the tanked public offering was predictable.

"It's a tough market out there," he said. "It's not surprising they would pull a deal."

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