January 21, 2013

UTC Power likely sold for a song

CONTRIBUTED PHOTO
CONTRIBUTED PHOTO
UTC Power of South Windsor manufacturers fuel cells, such as this one installed at UConn in 2012.

Hartford conglomerate United Technologies Corp. likely will sell its fuel cell subsidiary UTC Power at a deep discount to emerging Oregon firm ClearEdge Power, industry analysts say.

"ClearEdge is a little more than a startup," said Walter Nasdeo, managing director of New York City firm Ardour Capital Investments. "Because of the life stage of ClearEdge, this had to be a pretty cheap acquisition for them."

Because UTC expected UTC Power to sell below its value, the conglomerate took a $179 million impairment charge in the third quarter to adjust the fuel cell subsidiary's assets to be more in line with the expected sale price, according to a filing with the U.S. Securities and Exchange Commission.

Neither company disclosed the sale price when the deal was announced Dec. 22, but UTC had been looking to sell the so far unprofitable fuel cell unit for nearly a year as it restructured to focus more on aerospace and building manufacturing. The deal is expected to close in the first quarter.

ClearEdge, founded in 2003, had $6 million in revenue last year and had stopped shipping its products for a couple of months in the third quarter because of flaws in its design. The Hillsboro, Ore., firm is hardly the heavy hitter to pay a significant price for an East Coast acquisition, Nasdeo said.

"I would fall off my chair if ClearEdge paid $200 million for that company," Nasdeo said. "Maybe UTC just gave it to them, saying, 'Just take this off our hands.'"

UTC's unloading of its fuel cell subsidiary is another sign that large firms are retrenching against the technology that is still just starting to commercialize in a broad sense, said Jeff Osborne, managing director in New York City for St. Louis investment firm Stifel Nicolaus & Co., Inc.

"Strategically, it makes a lot of sense for the parties involved," Osborne said.

Fairfield conglomerate GE has been looking to get into the fuel cell industry for some time, but has yet to find a venture that makes business sense for them, Osborne said.

UTC Power, like ClearEdge and all other fuel cell manufacturers, has never had a net positive year. No company has reached the production levels to make a profit on the technology.

Danbury-based FuelCell Energy, Inc. is the top producer of fuel cells worldwide and suffered a $58 million loss in 2011, its smallest loss in the past five years. UTC Power is the No. 2 producer of fuel cells worldwide.

The UTC Power purchase makes sense for ClearEdge because it broadens the company's product offerings, Osborne said, and gives the company a presence on the East Coast.

ClearEdge produces proton exchange membrane, or PEM, fuel cells that are smaller, typically 5 kilowatts, and serve residential and small business customers. UTC Power produces phosphoric acid fuel cells that are larger, typically 400 kilowatts, and serve large commercial customers and feed power grids.

The markets for the two types of fuel cells don't overlap, and ClearEdge could take advantage if the worldwide market for the industry widens in the near future.

"The global scope of the industry is improving," Osborne said. "You are seeing quite a bit of interest in Europe."

In January 2012, ClearEdge announced a deal with Austria-based Güssing Renewable Energy GmbH worth up to $500 million by 2020 if ClearEdge deploys all 50 megawatts of fuel cells called for under the contract.

ClearEdge officials did not return calls for comment.

Since the sale was announced, the operations at UTC Power have been business as usual, said Jen Sager, spokeswoman for UTC Power.

The South Windsor manufacturer is working to fulfill its outstanding orders, including six fuel cells for CBS Studios in California and seven for South Korean power generator Samsung Everland. The company expects to ship 12-14 units in the first quarter.

"We have several other projects that we are working on but haven't been publicly announced yet," Sager said.

It would make sense for ClearEdge to keep the UTC Power workforce in South Windsor, Osborne said, because the talent and supply chain are already established in Connecticut; and the two different types of fuel cells use different raw materials and different suppliers. ClearEdge wouldn't benefit from economies of scale, at least initially.

"Given they are two completely separate units, it would make sense to keep them separate, and maybe over time, they will be integrated," Osborne said.

UTC Power has a contract with the International Association of Machinists Local 1746 running through December 2015 giving the union workers protection to keep their jobs if the company is sold.

ClearEdge has been looking for a location in Connecticut to expand its business, looking to take advantage of the supply chain and experienced workforce, said Joel Rinebold, director of energy initiatives for the Connecticut Center for Advanced Technology.

"It is a huge advantage, and very, very important," Rinebold said. "The facility in South Windsor has value and will provide increasing value in the future."

Rinebold said as the fuel cell industry moves further toward commercialization, mergers and acquisitions will become more commonplace, as firms want to expand their product offerings and take advantage of established supply chains.

ClearEdge's purchase puts them at the forefront of this movement and positions them well for the industry's growth, Rinebold said.

"They are a high quality company out of Oregon," Rinebold said. "This sale represents a potential win for them."

ClearEdge appears to be positioning itself to go public in the near future, Nasdeo said. That's the standard procedure for the company's chairman, James Kohlberg, who runs New York private equity firm Kohlberg & Co.

Kohlberg likes to make his money back off those initial investments such as ClearEdge, so he can invest in something else, Nasdeo said.

Kohlberg did not return a call for comment.

While ClearEdge has been praised for seeking to complement its product offerings by purchasing UTC Power, Nasdeo said having too many products can derail a young company, distracting focus from perfecting its core products.

"There has to be a compelling reason that's not readily evident for them to do a deal like this," Nasdeo said.

Maybe UTC offered to finance all of ClearEdge's sales for a number of years, or ClearEdge wanted some intellectual property held by UTC Power, said Nasdeo.

"I hope it is successful," Nasdeo said. "I would really love to see a fuel cell company commercialize and demystify the fuel cell for the public."

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