Solar Acquisition: Trina Solar Buyout Shows Value in the Solar Industry

By Markets Fool.com

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Trina Solar(NYSE: TSL) got a serious offer to be taken private on Monday and this time it may be for real. You may recall that in December, Jifan Gao, the chairman and CEO of Trina Solar, and Shanghai Xingsheng Equity Investment & Management offered to take the company private for $11.60 per share. But the deal was non-binding and the market didn't take it very seriously.

The offer that's currently on the table is a "definitive agreement" to pay $11.60 per ADS, which at the least should be taken more seriously than a non-binding one. It may also show that the discount at which Chinese solar companies are trading is too steep on the market today.

Why Trina Solar is a great buyout target

Over the past few years, Trina Solar has dealt with a stock price that it doesn't feel indicates the value of the underlying company. Trina Solar is a leader in solar panel manufacturing with 5.6 GW of PV module capacity and 967.3 MW of solar projects connected to the grid and $89.2 million in net income over the past year. But it couldn't garner a valuation above $900 million before Monday's pop.

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Part of the problem is that the market doesn't quite know what to do with Chinese solar stocks, which have been incredibly volatile over the past five years. Like Trina Solar, many manufacturers were heavily subsidized by Chinese state-run banks, allowing for a massive increase in panel supply that flooded the market and killed profitability.

It's only recently that companies have seen the oversupply pressures ease as competitors have gone bankrupt and some companies, like Trina Solar, are differentiating themselves on a technological front.

Could buyouts become the norm in solar?

Two companies withmany of the same technological features as Trina Solar are Canadian Solar (NASDAQ: CSIQ) and Hanwha Q Cells (NASDAQ: HQCL). Both are among the largest solar manufacturers in the world, they're profitable, they are developing solar projects themselves, and they're improving technology. To top it all off, they're worth just $870 million and $1.1 billion, respectively.

It's possible that a buyer looking to unlock value from those companies' portfolios could be interested in acquiring them. Given the recent trend toward top-tier companies that are currently taking market share, now may also be the time to consolidate power among solar manufacturers.

Solar stocks may be in value territory

This could be a sign for investors that solar stocks have finally entered extreme-value territory. If insiders, who should know the business better than anyone on the public markets, think shares are undervalued and a buyout at a significant premium is a good deal for them, maybe stocks are undervalued.

If leading solar companies continue to report profits in the next few quarters, I think there will be growing evidence that solar stocks should trade much higher than single-digit earnings multiples where they're trading today. At the least, the potential of a buyout offers a floor to the value of solar stocks, which the industry may already be reaching.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.