Deere Sells Wind Biz to Exelon - Analyst Blog

Deere & Co. (DE) completed the sale of its wind energy business, John Deere Renewables, LLC, to Exelon Corp.'s (EXC) wholly owned subsidiary, Exelon Generation Company. The deal, valued at $900 million, includes a provision for $40 million upon commencement of construction of the advanced development projects.

John Deere Renewables invests in and provides value-added services for wind project development. These services include comprehensive project development services, wind turbine supply and operation management as well as long-term debt and equity investment for wind energy projects in the U.S. and Canada.

In 2005, Deere established this wind energy business unit managed by its Credit segment. Since then, the company has invested over $1 billion in financing, development and ownership of wind energy projects.

At present, John Deere Renewables' portfolio comprises 36 completed projects in eight states with an installed, operating wind capacity of 735 megawatt that is sufficient to power 160,000 to 220,000 households not counting the numerous other projects in the pipeline. The pipeline comprises 1,468 megawatts of new wind projects that are, currently, in various stages of development, including 230 megawatts in advanced stages of development.

The wind business was not in line with Deere's core set of businesses. Accordingly, in February 2010, the company had divulged that it was weighing strategic options for its wind energy business, which included a possible sale. In this regard, Deere had retained Goldman, Sachs & Co., a wing of The Goldman Sachs Group Inc. (GS), as exclusive financial advisor. The company announced that it has entered into a definitive agreement to sell the business to Exelon in August.

Chicago-based Exelon Corporation is an electric utility company operating through its subsidiaries Generation, ComEd and PECO Energy Company. The generation business consists of electricity generating facilities, wholesale energy marketing operations and competitive retail supply operations. It has access to more than 38,000 megawatts of electricity and generates electricity through nuclear, fossil and hydroelectric generation facilities. With this acquisition the company will make an entry into the wind power business.

We believe the sale will enable Deere to focus more on its primary operation of manufacturing agricultural and construction equipment. Equipment sales growth is expected to be in the range of 10% to 12% in fiscal 2011. Agriculture and Turf sales are expected to increase in the range of 7% to 9% and Construction and Forestry sales are expected to go up by 25% to 30%.

Farm cash receipts are expected to be at record levels in fiscal 2011, which is promising.  Given increased global demand for food, shelter and infrastructure, we believe the long- term outlook for Deere remains strong. However, in the near term, margins are expected to be constrained due to elevated raw material costs and increased R&D costs associated with the new model introductions to meet rigorous global emissions standards.

Lingering weakness in European markets also remains a point of concern. We have thus downgraded our rating from Outperform to Neutral. The company is allotted a Zacks #3 Rank (short-term Hold recommendation) on the stock.

Illinois-based Deere & Company is engaged in the production and distribution of agricultural and forestry equipment, construction equipment and engines worldwide. It also provides financial and other related services. The company operates through three segments: Agriculture and Turf, Construction and Forestry, and the Financial Services segment.

Deere sells products through branch offices in the U.S. and Canada as well as through distributors and dealers for the resale of products internationally. Deere competes with the likes of Caterpillar Inc. (CAT), CNH Global NV (CNH) and Kubota Corporation (KUB).

 
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