Is a roll-up the answer to the renewable energy stock rout?

Hello from New York. Before we begin today, I want to draw your attention to the climate developments coming out of the meeting between Joe Biden and Xi Jinping in San Francisco.

The US and China supported tripling renewable energy capacity globally by 2030. They said they would “sufficiently accelerate renewable energy in their respective economies through 2030” to “accelerate the substitution for coal, oil and gas generation”. Our colleague Aime Williams has the story here.

For today, I covered the continuing rout in renewable energy businesses and sustainability companies broadly. Is it time to start thinking about consolidation for this sector? Would it make sense to merge firms under the public benefit corporation structure?

Please read on.

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The case for a sustainability roll-up

This year’s rout in renewable energy stocks is getting worse.

SunPower, a US residential solar provider, has seen its shares tumble by three-quarters from the beginning of the year. Last month the company said it would restate earnings from last year and the beginning of this year.

Enviva, the world’s largest producer of wood pellets (which are seen as a renewable energy source), replaced its chief executive amid poor earnings this month. Activist investor Jeff Ubben is Enviva’s second-largest shareholder through his sustainable investing fund Inclusive Capital. Enviva’s shares are down a whopping 97 per cent year to date.

Solar providers Sunrun and Sunova, as well as hydrogen maker Plug Power, are trading below their book value. San Francisco-based Sunrun this month said it would take a $1.2bn writedown as part of its shift towards energy storage.

The book value of a firm is calculated by adding up its assets and then subtracting debt, liabilities and goodwill. It’s what shareholders would own if the company were sold for parts (and creditors paid).

While the renewable stock slump is bad news for companies, it reveals fresh opportunities for investors. Legendary investor Warren Buffett built his success by identifying undervalued companies, and a share price-to-book of less than 1 can be a sign of a bargain. Buffett learned from value investor Benjamin Graham, who was scarred by the stock market crash that precipitated the Great Depression. Graham developed an approach to investment analysis that focused on identifying under-appreciated value rather than companies roaring ahead with growth.

One way to squeeze the value out of an underperforming stock is through a roll-up. The corporate roll-up strategy involves buying up a portfolio of similar businesses in the hope that cost savings will help the firms survive and thrive in the long term.

So does it make sense to roll some green companies together? As sustainability businesses, they could also be rolled up into a public benefit corporation: firms with a legal requirement to balance the interests of shareholders and other stakeholders.

Would investors buy in? Some financiers are already thinking about this set-up, Susan Mac Cormac, co-chair of the ESG and impact investing practices at law firm Morrison Foerster, said.

“I know people who are actually looking at those roll-ups and financing,” she told me this week. “Interestingly I also know people who are thinking about marrying green with less green assets under this structure.” 

There are 23 publicly traded public benefit corporations and about half of them are underperforming the broader market, she said. This is mostly due to the fact that they were rushed into the market and didn’t have fundamentals set by the time they went public. The mania in 2021 for special purpose acquisition companies (Spacs) did not help.

A sustainability roll-up could be broadened beyond renewable energy to include other sustainability businesses. Beyond Meat, the alternative protein business, has sustainability credentials linked to the avoidance of carbon emissions and animal cruelty. It has seen its shares drop about 42 per cent this year. And Allbirds, a shoemaker that attempted to float in a “sustainable” initial public offering, is also trading below its book value.

The tumble in these companies’ share prices comes as higher interest rates have driven up the cost of financing and threaten to undermine price cuts from the subsidies in President Joe Biden’s climate law, the Inflation Reduction Act.

Amid the stock market turmoil, hedge funds have seized on wind energy companies as short selling targets. Marshall Wace and quantitative trading firm Qube Research & Technologies are among the funds that have made millions in profits from falling share prices at Siemens Energy and Ørsted. These short bets reflect a broader loss of enthusiasm for green energy stocks, despite huge tax credits and subsidies offered by governments to renewables companies in the US and Europe.

This week’s stock market surge might help renewable and sustainability companies hang on. Inflation figures in the US that came in lower than expected suggested the Federal Reserve may not need to raise interest rates again in the near future. The inflation figures ignited one of the strongest one-day stock market rallies of the year.

Although roll-up companies might make financial sense, they are increasingly coming under pressure from the US antitrust regulator.

Writing in the FT in September, Lina Khan, chair of the Federal Trade Commission, said the agency has sued to stop an aggressive roll-up strategy to consolidate and eliminate competition. Roll-ups have historically been small acquisitions and antitrust enforcers did not care too much, she said.

“As a result, they have enabled firms to amass significant control over key services in local markets,” Khan said. “This has serious consequences for consumers, workers, businesses and communities.”

The Biden administration is obviously interested in protecting domestic cleantech businesses. But investors eyeing a roll-up strategy for struggling renewable energy and other sustainability businesses should be careful not to trigger the wary eyes of US antitrust regulators.

Smart read

The EU has agreed on new restrictions on methane emissions aimed at Europe’s energy sector as well as oil and gas importers, in an effort to crack down on the potent source of global greenhouse gases. Our colleague Ian Johnston has the story here.