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Shares of SunEdison Inc. (SUNE - Analyst Report) increased 5.3% yesterday, after the company declared that its "yield co" unit TerraForm Power Inc. is planning to raise $50.0 million from an Initial Public Offering (IPO). However, the details of shares and pricing remain undisclosed.

Following this development, TerraForm will be a newly formed dividend-paying company and will purchase renewable-energy assets from the parent company. SunEdison has appointed Goldman Sachs, Barclays and Citigroup to act as joint book runners for the deal.

In the initial tranche, TerraForm will own a portfolio in the U.S., Canada, the U.K. and Chile of 524 megawatts of solar farms. We believe that the IPO will boost operating leverage, cost synergies and liquidity of SunEdison.

A yield co is a publicly-traded company that is formed to own operating assets that produce cash flow, which is then distributed to investors as dividends. The yield co model enables the segregation of assets related to stable operating cash flows, which is therefore more attractive for investors. It is therefore a safer and cheaper way to finance growth and meet the rising demand for solar power.

Thus, we believe that the current strategy bodes well for SunEdison and will help it to emerge as a pure-play solar project developer. Moreover, SunEdison plans to utilize the proceeds to deleverage its balance sheet.

SunEdison decided to divest its semiconductor business to focus on its core solar power business. The decision was also prompted by the lower-than-expected demand for its semiconductor wafers.

It is worth noting that SunEdison reported an 11.3% year-over-year decline in revenues from its semiconductor business in the last-reported quarter. At the same time, the solar business did exceptionally well, growing 86.8% year-over-year.

Though SunEdison’s growing exposure to the solar energy market is encouraging, project development requires considerable time and investments. Hence, any delay or inability in selling these projects at desired prices could have an impact on liquidity.

Moreover, SunEdison has a highly leveraged balance sheet. The company exited the first quarter with cash, cash equivalents and restricted cash of $526.6 million compared with $643.6 million in the previous quarter. Long-term debt (excluding current portion) was $3.49 billion.

Going forward, the pricing environment and competition from SunPower Corp. (SPWR - Analyst Report) and First Solar Inc. remain the headwinds.

Currently, SunEdison has a Zacks Rank #4 (Sell). Some better-ranked stocks worth considering are Juniper Networks, Inc. (JNPR - Analyst Report) and Accenture plc (ACN - Analyst Report), both of which sport a Zacks Rank #2 (Buy).

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