Expanding with Other Peoples' Money (WFR)

I continue to be very encouraged by the progress MEMC Electronic Materials (WFR) is making in diversifying their revenue streams and expanding their production capacity.

WFR is a silicon wafer manufacturer, and supplies both the semiconductor and solar cell industries. In the past, the semiconductor industry has been the dominant consumer of polysilicon and of silicon wafers, but the surging growth of solar power due to high oil prices and higher government subsidies has completely changed the demand picture for MEMC's products over the past two years.

WFR announced earlier this year that they planned to double their polysilicon production and, as a result, doubling their revenue by the end of the decade.

Polysilicon shortages have been a critical problem for both wafer makers and solar power companies recently, as evidenced by the beating Evergreen Solar (ESLR) took when WFR announced that they were reneging on their agreement to supply ESLR. But WFR, unlike most in the industry, makes their own polysilicon and has a vertically integrated supply chain that gives them significant cost advantages over their competitors who have to buy this raw material on the overheated spot market.

But more recently, MEMC has taken a few steps to greatly reduce the cost and risk of this massive capacity expansion and give them some additional exposure to the solar power market.
Back in April, WFR made a deal with Motech, a solar cell manufacturer, that essentially gave them a big cash infusion and a piece of the action (a warrant for 5% of Motech shares). I wrote about that at the time, and I still think it was a smart deal.

But it fell apart. The parties announced today that the deal wasn't going to work for their needs and allowed the letter of intent to dissolve.

And good news sprung from the ashes -- MEMC has now signed a similar letter of intent with another solar company, Suntech Power (STP), that is seeing huge growth and is working hard to ensure adequate wafer supply to help them keep up with demand.

As a low-cost solar power producer in China, a market that has made a huge commitment to expanding solar power use, Suntech is probably a stronger upside bet for future growth of the solar industry, and I think the potential for WFR to acquire 5% of STP as a part of this deal is very promising -- more promising than a position in Motech would be.

We'll see if it works out this time -- the fact that they're essentially replacing one deal with another shouldn't have a huge impact on the stock (the shares jumped up huge in pre-market, but settled down quickly when realization set in that they weren't going forward with both deals). I do, however, think STP is a marginally stronger partner than Motech and I'll be happy to see this deal succeed if they can work out the details -- we should know by the end of August whether the Letter of Intent will generate a binding deal.

MEMC Electronic Materials has come a long way since it's lowest days about two years ago -- it's no longer the 200% winner for me that it was at the peak in May, but I have every confidence that this will remain a smart investment thanks to their continued solid growth, smart financing as evidenced by these two prospective deals, and diversity of income streams as the solar and semiconductor industries both continue to expand in volume.

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