Conergy Restructuration

Rothschild: The Conergy Financial Restructuring Conundrum (Abridged), LBS case

1. Why did the business get into trouble? Evaluate the various attempts to turn the company around, and consider why they did not succeed.

The business got into trouble because:

• The market turned.

During 2007, the markets for solar thermal and bioenergy collapsed. Wholesale prices for solar modules fell by about 20%.

At the end of 2008, the Spanish government reduced feed-in tariffs by 35% and set caps on volumes. Conergy’s revenues in Spain—its largest international market—fell by 87%. In the same time, German government announced that it would reduce its own feed-in tariffs by up to 25%, in two stages, by October 2010.

➔ Revenues are much lower than expected.

• Bad strategic investments have been made.

The former and emblematic CEO engaged some huge investments to grow the business.

First, he decided to diversify the business on geothermal and bio thermal activities, but the bioenergy market developed far worse than expected. In the same time, a big factory was built to manufacture the solar modules, however it suffered from severe operational inefficiency. Inventory also went up.

➔ Performance was poor, working capital increase and debt exploded.

• Too risky contracts were signed.

The CEO hired a lot of people to manage the expected growth of the business, which didn’t happen.

Then, to secure continuity of supply for its most critical resource at a time of rising prices, Conergy signed an agreement with MEMC, a supplier of crystalline silicon, to purchase $8 billion worth of wafers over ten years at a fixed price on a take-or-pay basis. Conergy renegotiated the price after the fall of the market, but it took a long time to come back at a prices in line with the market.

➔ SG&A expenses and COGS increase.

The combination of all those elements implies negative cash flow from operations and investing activities, which put the business into trouble.

Various attempts to turn the company around have been made:

• Available short term liquidity

To ensure sufficient operating liquidity, on July 31, 2007 Conergy closed a syndicated credit facility for a total of €600 million from 23 banks under the leadership of Commerzbank and Dresdner Bank. Then, in December 2008, Conergy executed a capital increase, generating proceeds of €399 million.

• Improvement in management control

In 2008, a new control system was introduced to effectively manage the company through the use of consistent data and KPIs while improving reporting transparency.