Solar manufacturer SunPower said Wednesday it’s buying PowerLight, the largest commercial solar integrator in North America, for $265 million.

Including a $67.5-million stock-option “retention carve-out,” expected to vest over the next two to four years, the total deal calls for $130 million in cash and $202.5 million in stock, and is expected to result in a tax-free merger for PowerLight’s shareholders.

With a worldwide silicon shortage that some say is beginning to ease—and that others expect will end anywhere from 2008 to 2012—Red Herring predicted that consolidation would be coming (see Solar’s Silicon Shakeup).

PowerLight would seemingly be large enough to survive on its own. But the deal will take the company public, and PowerLight’s been looking to go public for some time, said Joel Makower, a principal at research firm Clean Edge.

“It seems that The Street wasn’t ready for them to do that, so I think this is Plan B,” he said. “PowerLight was the first large-scale solar installer and really paved the way, but now they have a lot of competition, EI Solutions among them.”

Preparing for the Tables to Turn

Aside from liquidity, PowerLight will get a growing source of solar panels that will allow them to grow further, PowerLight CEO Tom Werner said. Also, the companies will combine R&D and their supply chain. “Now they can focus on R&D and project management, and SunPower will cover the administration stuff,” Mr. Werner said.

For SunPower, the deal is “an interesting diversification” that should make it a more stable company when silicon prices fall, said Mark Cox, CEO of the New Energy Fund, a hedge fund. SunPower and other “upstream” manufacturers are seeing good margins now because of the shortage of silicon, but that could change to the advantage of “downstream” players—solar integrators and installers, he said.

“Because so many solar silicon producers are adding capacity, it’s expected that when that comes online two years from now, the silicon price will drop and margins will shrink,” he said. “Then the margin fatness moves back downstream. So the upstream people will be snapping up the downstream people.”

Still, industry watchers said they were surprised by the acquisition. “This is big news,” said Clean Edge’s Mr. Makower. “We need consolidation among the power players.”

A Lot of Money

The New Energy Fund’s Mr. Cox said it “seems like a lot of money” to pay for PowerLight. But it makes sense for a solar manufacturer like SunPower to integrate other parts of the value chain into its business, he said.

Mr. Werner said the purchase is key to the company’s future. “We’re skating to where the money will be,” Mr. Werner said. “We both think we need to get competitive with retail electric rates, and we think together we can get competitive better than we can apart.”

The new combined company aims to lower the cost of solar electricity by 50 percent by 2012, he said.

As part of the deal, PowerLight employees are “revesting” their stock options for an additional two years, meaning they won’t be able to cash out any options that would have vested now until two years from now, and only if they stay with the company, said Mr. Werner.

That shows employees plan to stay with the company, and also that they believe the stock options will be worth more later, he said.

Of course, the companies aren’t strangers. In December, the companies signed a $330 million agreement for PowerLight to buy SunPower panels. Employees knew each other. “People knew each other from other companies and worked together as partners. Because you know each other, the likelihood to have a culture mishmash is minimized,” Mr. Werner said.

While the companies are still finalizing their merger strategy, the PowerLight name will survive “for the foreseeable future,” Mr. Werner said.

Also, the companies will do their best to continue existing partnerships with companies that—with this merger—could now be considered competitors, he said. After all, SunPower works with other integrators, and PowerLight has contracts with other manufacturers.

“A lot of competitors also do complimentary things, and hopefully we can still work together,” Mr. Werner said. “We’re optimistic that most, if not all, of our relationships will be maintained. Where there’s overlap, but we think the market’s big enough and growing enough that I think coopetition will work. Three years down the line, we’ll see, but in the short term I still think we’ll compliment each other.”

PowerLight CEO Tom Dinwoodie was unavailable for comment. But in a press statement,

said the company is “excited” about the acquisition.

Mr. Makower also said he expects to see more acquisitions soon. “As a lot of the emerging companies—the Nanosolars, the Miasolés, and the Solaicxs—start entering the market, if they don’t go public they are going to be snatched up pretty quickly,” he said. “We’re going to be seeing more integration providing everything from raw material to rooftop. We’re getting to that dot-com-like ‘Get Big Fast’ phase.”

Contact the Writer: jkho@redherring.com