Rooftop Solar Rivals Take On Tesla - The Wall Street Journal

Contractors install Sunrun solar panels. Like industry peers, the company depends on access to cheap... — Contractors install Sunrun solar panels. Like industry peers, the company depends on access to cheap capital to fund installations.
Photo: David Paul Morris/Bloomberg News

By Jinjoo Lee

July 7, 2020 2:08 pm ET

Overhead costs have long been a headache for rooftop solar companies like Sunrun and Vivint Solar. The coronavirus pandemic finally made them do something about it.

The companies announced Monday evening that Sunrun would buy Vivint Solar for an enterprise value of $3.2 billion in an all-stock deal. Both companies’ shares gained on the announcement: Sunrun’s by 24% and Vivint Solar’s by almost 40% by Tuesday afternoon.

The combination forms a company that would overtake Tesla’s residential solar business in scale: Last year Tesla accounted for 14% of cumulative U.S. residential solar installations, the largest share for a single company, according to UBS Research. Sunrun and Vivint together accounted for 16%.

The immediate cost “synergy” the companies announced seems underwhelming at $90 million a year. That represents about 4% of the combined companies’ total spending, their executives said in a call discussing the deal Tuesday morning. Savings include those from consolidating office space where the two companies overlap.

The hope would be that their larger scale will eventually help the company to tackle so-called “soft costs,” including labor, permits and customer acquisition. Even as hardware costs for residential solar systems have declined over the years, the companies’ overhead has remained flat. As a result, soft costs accounted for 64% of residential solar overall costs as of the first quarter, up from 52% in 2014, according to Wood Mackenzie and the Solar Energy Industries Association.

The combination also could help in other ways. Sunrun, like industry peers, depends on access to cheap capital to fund its installations. Greater scale should help bring costs down as fees associated with structuring and marketing debt will be spread across a larger pool of assets. The companies also have complementary strengths: Sunrun is ahead of Vivint Solar when it comes to battery storage sales, while Vivint Solar has long been known for its ability to sell door to door.

The combination isn’t a reaction to poor fundamentals in the long run: Residential solar looks promising. Unlike larger scale solar, which saw its second consecutive year of declining installations in 2019, residential solar has been growing at a fast pace—particularly in California, bolstered by power shut-offs. The pandemic put a substantial damper on the pace of that growth, but the runway is there: Just 3% of households have solar power at home, according to Sunrun.

Investors’ sunny disposition about this deal seems justified.

Write to Jinjoo Lee at jinjoo.lee@wsj.com

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