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REC Gives Up Vertical Integration, Splits Wafer and Module Divisions

With plummeting prices in the past few years, many upstream solar companies have expanded further downstream in the value chain to maximize their growth prospects and profits. But here's the Catch-22: in many cases this expansion of solar market exposure has multiplied the cost pressures from all directions in the market's relentless march to lower costs overall. Increasingly it's made more sense for solar cell and module companies to just procure the material rather than make it internally. The next big wave of industry consolidation might well start with vertically integrated manufacturers.

And so Renewable Energy Corp. (REC), which had both silicon and solar module businesses, has now decided to cleave them into independent listed entities. "We recognize that it will be increasingly demanding to grow and maintain a leading position with a vertically integrated business model," stated REC president/CEO Ole Enger. The units already have "limited operational synergies" with separate structures for operations, R&D, and sales & marketing, the company acknowledges, so evolving them into a pure-play solar company and a pure play silicon company will put both units "in a favorable position for attracting capital, and well equipped to streamline the market approach and stay in the forefront in terms of technology development," he said. (Splitting the two units also makes them more attractive for possible M&A interests, according to a financial analyst quoted by Bloomberg.)

At last year's Intersolar North America, Jan Jacob Boom-Wichers, managing director of the Americas region for REC Solar US, touted the company's vertical integration strategy, which he said was not just for "vertical integration's sake" to better secure components, but to take advantages of its lower manufacturing cost profiles, specifically its fluidized bed reactor technology. He also noted the company's size and stability, from revenues to a relatively low (below 50 percent) debt/equity ratio. Watch the entire interview below.

Times have changed, though. In a slide deck outlining the planned separation, REC indicates that despite somewhat improved spot prices for both polysilicon and modules over the past couple of quarters, poly-Si prices are still barely half what they were a year ago, and solar module prices are down 15 percent. Another slide shows how there's around 45 gigawatts of industrywide poly-Si capacity at cash cost below US $25/kg (where REC is currently at), vs. current spot-market prices for poly-Si at around $16/kg.

The details of the transaction involve offering all the shares of REC Solar to existing REC shareholders in a NOK 800 million (€102 million) fully underwritten offering from the end of September to mid-October. REC Silicon will remain with the parent group REC ASA with Enger as the top exec, though the current headquarters in Sandvika, Norway will eventually "be downsized significantly" and corporate functions transferred to the U.S. operation. (REC already had been ramping down its Norwegian solar wafer division.) REC Solar, the module side of the business, will have its headquarters in Singapore and be led by Øyvind Hasaas. That unit has about 1500 employees, and expected output of around 775 MW this year.

A year ago REC Solar eked out a profit of on NOL 1.145 billion in sales; for the next three quarters it lost NOK 334 million (half of that in 3Q12) and sales fell by 35 percent. In the first three months of 2013, though, the unit spun a NOK 75 million profit on its best sales in a year (NOK 1.07 billion), enjoying higher selling prices and reduced inventory. The unit has a net debt of NOK 1.7 billion and an equity ratio of 53 percent. It has an undrawn bank credit facility and guarantee facility, both NOK 400 million and both maturing in April 2014.

Lead image: Split road sign, via Shutterstock

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