Warren to buy Suntech?

Suntech stock surged almost 28%, after a rumor that the world’s smartest investor Warren Buffet would buy the company. I don’t know why would Buffet invest in the penny stock and if anybody other than the Chinese Government would be interested in Suntech. Though Warren Buffet had invested in solar energy farms through his MidAmerican Energy and the Chinese green company BYD earlier, I can’t see this bearing any relationship to the recent rumor about Buffet buying Suntech’s stock, since the company is one of the worst managed solar companies in the industry. I don’t think the rumor will eventually turn out to  be true, however the market has reacted very acutely to this situation and Suntech stock price has seen an increase. This is the perfect time for investors to take advantage of the price surge and sell their Suntech shares for a good price.

Suntech (STP) has been going through tumultuous times after it got entangled in a multi-million dollar fraud and firing its chairman and founder Zhengrong shi. The company now has defaulted on $541 million convertible debt, which came up for redemption on 15th March 2013. The company had only negotiated with 60% of the bond holders for extension of debt repayment. While a debt default means automatic bankruptcy in the West as debt holders try to get their money back, it is not as simple in emerging markets like India and China. The debt holders will have to go through the torturous legal proceedings before they can get some, if any of their money back.

Bloomberg

“If Buffett were to buy Suntech, he would be entering a company with big debt and a market where solar product prices are still low,” James Kelleher, a director at Argus Research in New York, said by phone. “Suntech doesn’t have any of the advantages of Buffett’s other previous acquisitions. China would be reluctant to do debt restructuring for Suntech should Buffett take over.”

“The rumor Buffett is interested in buying Suntech, and separately, Trina saying they will see profit again in the second half this year” is helping drive gains in solar equities, Gordon Johnson, an analyst at Axiom Capital Management Inc., said by e-mail in New York. “Chinese solar companies would be bankrupt were it not for their ability to roll over existing Chinese debts.”