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MEMC Adds to Solar Suite

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In conjunction with delivering a strong quarter last week, the semiconductor and solar technology provider MEMC Electronic Materials Inc. announced the acquisition of a wholly owned U.S. subsidiary of Fotowatio Renewable Ventures Inc. ("FRV").

MEMC has agreed to pay FRV a total sum of $134.9 million ($112.0 million in cash and $22.9 million debt repayment). The company will also pay $103.6 million on performance targets met by the subsidiary.

FRV is the global leader in terms of development and operation of solar power plants. It has already developed more than 2.2 GW of solar energy and roughly 241 MW is under construction. Its subsidiary, FRV U.S. pioneered solar projects in that region and currently owns a total of 42 MW of capacity for operating solar power plants. The U.S. unit also has a solid project pipeline totaling 1.4 GW.

With the acquisition, MEMC will inherit FRV’s U.S. pipeline projects, which are in various stages of development, bringing its total downstream pipeline to 2.5 GW. The acquisition will further strengthen MEMC’s position in the U.S. utility solar market. It is expected to close in the back half of this year.

MEMC’s acquisition of solar developer businesses could make it a significant player in the downstream solar project developer, operator and owner markets. In 2010, it acquired Solaicx Inc., which is a privately held manufacturer of low-cost, high-quality silicon ingots for the solar industry. The acquisition enabled MEMC to reduce costs and increase wafer production by means of Solaicx’s innovative manufacturing technology.

In 2009, MEMC acquired solar fab developer SunEdison for $200 million and followed it up with a solar financing outfit called Tioga Energy. SunEdison is currently operating as MEMC’s solar energy segment.

We see MEMC’s solar initiatives as a key driver over the long term. The company recently tied up with other important players such as Flextronics International Ltd. (FLEX - Free Report) and Jusung Engineering Co. Ltd. to make its solar ventures more cost efficient and profitable.

But the ongoing over capacity situation in the solar market will continue to impact pricing and profitability. Hence, we believe it will be hard for MEMC to significantly improve its earnings in the near to intermediate term. Also, the recent cessation of a solar wafer supply agreement with Suntech Power Holding Co. Ltd. was alarming.

The deal came to an end only because of the continued decline in polysilicon prices, which made the deal price more expensive for Suntech. While the exact financial impact is uncertain (MEMC did not specify), we believe that both revenues and margins will be affected.

Moreover, there are risks of cuts in feed-in tariffs, which could affect solar deployment.

Currently, MEMC has a Zacks #4 Rank, implying a short-term Sell recommendation.

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