If you’re a manufacturer, you’d probably agree that the potential specter of new competitors that can build products like yours, and sell them at a much lower price than you can, is a risk factor worthy of nightmares.
For Conergy, the Germany-based global solar energy company, it was all too real when, in the mid-2000s, Chinese upstarts began producing solar panels, inverters (devices that convert panel current to usable electricity), and panel mounting structures. Conergy manufactured such products at home, where wages were far higher than in China.
The result: a bankruptcy filing in 2013, when Conergy, then a public company in Germany, was continuing to suffer hefty bottom-line losses and wound up with negative equity of about $100 million.
Conergy’s current CFO, Christina Welsch, who at the time was vice president of corporate finance and had previously spent eight years as a restructuring and refinancing expert with global consultancy Roland Berger, became a point person for the mission to find new capital to revive the business.
Welsch — who earned a doctoral degree in strategic controlling from Technical University Berlin for her work on early recognition of corporate crises — already knew Conergy well when she came aboard in 2010 as vice president of business development, as the company had been one of her clients at Roland Berger.
“I joined Conergy with nearly a decade of experience dealing with corporate financial crises in various industries, and Conergy at that time was in the midst of one,” she says. “From 2007 to 2013 the company went through many up and downs, mainly because we were heavily involved in manufacturing, and there was more than a 40% annual decline in the price of solar panels for several years in a row. The holding company — at the time listed as Conergy AG on the German market — finally had to file for bankruptcy, but I had begun to focus on bringing in new capital a year before the bankruptcy.”
To the rescue came Kawa Capital Management, a Miami-based private equity firm. Less than five months after the bankruptcy filing in early July of 2013, the parties completed a deal in which Kawa became the majority shareholder of Conergy. Other investors include Magnetar Capital and RWE Supply & Trading, the energy trading arm of large European utility RWE.
The company’s manufacturing and distribution arms were later sold off, leaving four service lines:
- Project development — bringing a project to a state where all necessary permissions have been gained and construction can begin
- Financing — lining up bank loans to finance projects so that customers don’t have to pay anything up front (in exchange, the company typically signs a “power purchase agreement,” a type of lease under which it gets a revenue share on the sale of electricity produced by the plant)
- Engineering, procurement, and construction (EPC) — the architecture and design of the plant, procuring the equipment to be used, and performing the construction
- Post-construction operations and maintenance (O&M) services
“We are fully focused on project development and execution of large solar plants,” says Welsch, “and are no longer involved in any manufacturing — now we use other companies’ equipment, which we call being ‘asset-light.’ We used to have to compete with manufacturers, and the Chinese ones are impossible to beat. Now we just have to compete with other developers, and there are only a couple that can match our 17 years of experience and full suite of services.”
So far, the new business model seems to be working. In 2014, the year after hitting bottom, Conergy generated half a billion dollars in revenue and achieved operational profitability with EBITDA in the single-digit millions of dollars, says Welsch, who was promoted to CFO in March of this year (she had actually been de facto finance chief since July 2013, when the previous CFO left the company).
“It’s still a turnaround [situation], because we’ve had to recover from the bankruptcy, we have a different focus, we have positive equity, and we have a different balance sheet structure,” she says. Her team compiles financial data from all 15 nations in which the company operates, and it’s refining its processes for providing analysis on solar-project opportunities and helping to decide which will deliver the best financial return in the short and long terms.
In addition to the deeper pockets of Kawa, Conergy last year closed on a $60 million bank guarantee facility arranged by Deutsche Bank and financed by Tennenbaum Capital Partners. There are still more opportunities than the company has the capital to take advantage of, but for many of the projects it does work on, its improved access to capital allows it to buy “project rights” in an early phase of project development.
Solar plants, Welsch notes, are developing into an asset class perceived as valuable because of the long-term cash streams associated with them. That’s why Conergy’s preferred arrangement with project owners is to buy the rights to make decisions regarding construction, financing, maintenance, and if the plant is ultimately to be sold, who to sell it to. After securing such rights, typically Conergy in essence contracts with itself to act as EPC provider.
The company also will simply provide services for plant development and construction without a project-rights deal, but it makes more money if it has one.
“We do direct sales and co-development agreements that secure, from early in a project’s development process, that Conergy will be the ones to execute it,” she says. “In a RFP bidding process there is a lot of competition, because it’s simply about offering the lowest price. But if we find our own customers or join existing projects with co-development partners, we can lock in greater margins by building the project and then selling it, turnkey, to investors. This makes us more independent than we’d be just participating in bid processes, which puts us in a better competitive position.”
Conergy performs both ground-mount and rooftop solar power installations and handles commercial, industrial, and residential projects. The company works in established markets — the United States, the United Kingdom, Australia, Canada, Germany, Italy, Japan, Singapore, and the United Arab Emirates — as well as emerging ones including Brazil, Chile, Mexico, the Philippines, Thailand, and Turkey. Plans for expansion into other countries are in various phases of development.
“Sometimes we choose a less-established market even though it is more risky,” says Welsch, “like if we know that the local construction workers don’t complete projects on time or that we won’t make as much money on the deal in the foreign currency, because we want to be leaders in a new market and get more business through referrals.”
Some banks are reluctant to finance projects in the developing world. “Part of our job is proving that it’s not too risky because we can mitigate the risks with our expertise in moving into new markets,” Welsch says.
Conergy does not yet provide all of its services in all of the countries it serves. For example, in Thailand it has developed ground-mount solar plants but not yet any rooftop ones. “It’s a lot to keep track of, because you can’t make a perfect chart with all 15 countries across the horizontal axis, and our [services and types of installations] on the vertical axis.”
Doing business in 15 countries is, of course, a complex undertaking. There are the usual challenges that finance teams of multinational companies encounter because of different currencies, tax structures, and financial reporting requirements. But the term “solar coaster” is often applied to the solar industry, because much depends on public policy in different countries that is subject to (and does) change. At any point in time, some allow leases of solar plants, others don’t; some offer tax incentives, others don’t.
“It is a strategic advantage to be a global company because if a nation is doing poorly or [abolishes] its tax incentives, we can reallocate resources to other countries,” Welsch says. “That adds complexity and can be a challenge for finance. On the other hand, it is an opportunity to leverage the knowledge we’ve gained” from country to country.