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Another solar boss bids to privatize manufacturer

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A worker walks between rows of rooftop solar panels at the Hokubu Sludge Treatment Plant in Yokohama, Japan, in 2016
Source: Associated Press

Xiaohua "Shawn" Qu, the chairman, president and CEO of Canadian Solar Inc., is the latest solar manufacturing boss to mount a campaign to take over his company, building on a broader trend of solar cell and panel makers looking to exit U.S. public markets.

In a Dec. 9 letter to Canadian Solar's board of directors, Qu said he would pay $18.47 per common share, a 7% premium to Canadian Solar's closing stock price on Dec. 8, the last trading day before the offer was announced. Qu and his wife, Hanbing Zhang, own nearly a quarter of the company's outstanding shares.

With Qu's offer, three of the world's top five solar panel manufacturers have gone or are considering going private, according to Carter Driscoll, an analyst at B. Riley FBR Research. Having achieved industry dominance, the companies no longer need "our money or scrutiny," said Paula Mints, chief analyst at SPV Market Research.

Qu, whose company is based in Ontario but manufactures a "significant portion" of its hardware through Chinese subsidiaries, said a deal would deliver "superior value" to shareholders compared to remaining a public company. Canadian Solar on Dec. 11 said a special committee of independent and disinterested directors is considering the nonbinding proposal.

Canadian Solar shares were up 3.13% to end the Dec. 11 session at $17.79 on above-average trading volume.

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Putting up with us

Canadian Solar could take months to review Qu's offer as its board considers the potential impact of a pending trade case and proposed changes to the tax code in the U.S., as well as an uptick in sales and an initial public offering in Japan that should help the company reduce its debt and recycle cash, Driscoll said.

Mints sees little incentive for the company to maintain its listing on the Nasdaq stock exchange, pointing to the uncertainty created by the trade case, tax proposals and potential regulatory action. With plenty of demand in China, "why do they need to put up with us?" Mints said in an email Dec. 11.

"The U.S. is no longer very important for Chinese players, who are busy in their domestic market," Jenny Chase, manager of Bloomberg New Energy Finance's Solar Insight team, said in an email Dec. 11. Additionally, the cost of maintaining a U.S. listing "may not be justified by any advantages in terms of brand recognition," Chase said.

In March, Trina Solar Ltd. went private through a merger with Red Viburnum Co. Ltd., a subsidiary of China-based Fortune Solar Holdings Ltd. ReneSola Ltd. in September transferred its manufacturing business to company Chairman and CEO Xianshou Li. And in November, JA Solar Holdings Co. Ltd. said it could go private through a deal with its chairman and CEO, Baofang Jin. Days before Qu sent his offer to Canadian Solar's board, Mints speculated that JinkoSolar Holding Co. Ltd. could be one of the next Chinese manufacturers to exit the public markets after the company couldn't say when it expects to generate positive cash flow.

Solar cell and panel manufacturers suffered last year from plunging prices as supply outstripped demand. But even this year, with better-than-expected demand and rising prices, "there's still not a lot of free cash flows," Brad Meikle, a senior renewable energy analyst at Coker & Palmer Investment Securities Inc., said on JinkoSolar's earnings conference call Dec. 7.

"There is a skewed mentality by some companies like [JinkoSolar] who pursue growth over profitability," Meikle said in an email Dec. 11. "Why would anyone ever own stock in a company that never returns cash to shareholders?"

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'Stealing' the company

At Canadian Solar, operating expenses have exceeded operating income the past two years. The company, which is expanding its manufacturing capacity in order to drive down costs, reported third-quarter net income attributable to the company of $13.3 million, or 22 cents per share, compared to net income of $15.6 million, or 27 cents per share, a year earlier.

"As with Trina, the motivation is probably the sense that U.S. valuations are low in proportion to financial strength, compared with their Chinese peers," Chase said of Qu's proposal to Canadian Solar. Privatizing the company shouldn't have much "practical impact," though it would make the market "a bit less transparent" and "remove some pressure to close deals before quarter-end to boost numbers."

"[Since] Trina went private they have walked away from [lower-priced] deals," Meikle said. "They're probably making a lot of money." Meikle said Qu should have to pay significantly more than he is offering to take Canadian Solar private. At the current offer, Qu would be "stealing" the company, he said.

Qu said that he and his wife plan to provide cash and rollover equity financing for the deal, while debt is expected to come from outside lenders. "I am confident that I can timely secure adequate financing to consummate the Transaction," Qu told his board.