Buffett to rescue Suntech?
Rumours of a Warren Buffett investment in Suntech are most likely false, though Buffett could ultimately invest in China's solar sector when it returns to health
Intriguing rumours that billionaire investor Warren Buffett might be eying bankrupt former solar superstar Suntech (NYSE: STP) are breathing new life into embattled solar shares, as traders bet that western investors could help to revive the sector. Such a move would indeed be a major vote of confidence in this tarnished industry, since most observers believe that no private investors would want to bet on this group and a state-led rescue will be necessary to save the shaky sector. But all of that said, I'm quite skeptical that the latest rumors are true, since Buffett isn't known for investing in problem-plagued companies or sectors.
Let's take a look first at the reasons why the rumours might be true to see why investors were so excited. Buffett has shown a recent interest in new energy companies, some of which could be poised for big growth as many governments try to wean their economies from overdependence on traditional fossil fuels.
Now let's take a quick look at the reasons why an investment in Suntech doesn't really sound like something Buffett would consider. Leading the list is the complexity of Suntech current situation, after the company defaulted on more than US$500 million in debt and was forced into bankruptcy last month by its largest lenders.
Not only is Suntech now in bankruptcy, but the case is being heard in a court in Suntech's home city of Wuxi where the local government wields big influence. Buffett would have to be very brave to try his luck in this unfamiliar territory, which is hardly like a bankruptcy case in the US court system.
The case is further complicated by Suntech's problematic founder Shi Zhengrong, formerly one of China's richest men but now better known for creating many of the problems that led to his company's rapid crash. Shi's refusal to yield control of his company in exchange for a government bailout was largely responsible for the bankruptcy that was ultimately forced on Suntech.
Many expect that Shi will be pushed out of the company as part of a restructuring that will see government entities become Suntech's controlling stakeholders. Beijing and the Wuxi government might actually welcome Buffett's participation in such a restructuring, since it would provide the company and also China's broader solar sector with a huge new credibility boost.
But I suspect that Buffett is too smart to get involved in such a messy affair, especially since there's no evidence just yet that the industry can be commercially viable in its present state. Accordingly, this latest rumor is probably either just wishful thinking by Suntech or some of its rivals, or perhaps it was deliberately created by traders looking to make some quick cash from the stock rally. I expect the rumor will quickly disappear after this week, though it's still is possible Buffett could invest a year or two from now when the sector finally returns to more stable footing.
Bottom line: Rumours of a Warren Buffett investment in Suntech are most likely false, though Buffett could ultimately invest in China's solar sector when it returns to health.
To read more commentaries from Doug Young, visit youngchinabiz.com