* To issue 30.901 million shares to Silver Age
* Says JA Solar's internal wafer capacity to go up to 785 MW
* Deal expected to close by the end of Q3 (Adds company comments from conf call, analyst comments, details in paragraphs 2-4,6-10; updates shares)
By Krishna N Das
BANGALORE, July 1 (Reuters) - JA Solar Holdings Co Ltd said it would buy wafer maker Silver Age Holdings in a $171.5 million stock deal that will more than double its internal wafer capacity and cut the cost of making solar cells.
Cost of silicon wafers, the major raw materials in producing solar cells that convert sunlight into electricity, contributes a large part of JA Solar's cost of making solar cells.
Solar companies are seeing a fall in margins due to a sharp decline in solar panel prices as stocks piled up amid falling subsidies in key European markets like Germany and Italy.
However, despite the glut, companies continue to ramp up production, expecting higher demand from countries like China and the United States.
The acquisition of Silver Age, which owns China-based wafer producer Solar Silicon Valley Electronic Science and Technology Co, will take JA Solar's internal capacity to 785 megawatt (MW).
The increase in internal capacity will immediately improve JA Solar's gross margins after the deal closes, an executive at the world's No. 2 producer of solar cells said on a conference call on Friday.
"The acquisition... should only drive down its already ultra-low, sub $0.20/watt processing cost structure. That should help drive margins, which we are currently expecting to trough in the second quarter," Raymond James analyst Alex Morris said.
The transaction is expected to close by the end of the third quarter, an executive said on the call.
Sanghai-based JA Solar, which began making silicon wafers in 2009, had said in April it wanted to expand wafer capacities to 600 MW by the end of this year.
"By boosting JA Solar's internal wafer capacity through this acquisition, we expect to achieve greater economies of scale and improve the company's profitability," JA Solar Chief Executive Fang Peng said in a statement.
As Silver Age is 70 percent owned by Jinglong Group, which is controlled by JA Solar's Chairman Baofang Jin, the company formed an independent committee to negotiate the deal.
JA Solar will issue 30.901 million shares to Silver Age. JA Solar shares had closed at $5.55 on Thursday. The stock, down 20 percent this year, fell 2.54 percent to $5.40 in early trade on Friday on Nasdaq.
Analyst Morris said the deal comes to about $0.37 per watt, "which seems to be relatively inexpensive."
"In order to compete in an environment of steep average selling price declines low cost structures are of paramount importance, and I think we'll continue to see companies try to manage that partly through M&A," Morris said.
China's Suntech Power Holdings Co Ltd , Trina Solar Ltd and Yingli Green Energy Holding Co Ltd and U.S. company First Solar Inc are the likely companies to look at adding wafer capacity through acquisitions.
Goldman Sachs (Asia) acted as the financial adviser to JA Solar. Silver Age shareholders were advised by Credit Suisse.
Separately, Suntech Power Holdings Co Ltd ended a deal to buy silicon wafers from MEMC Electronic Materials Inc , as falling silicon prices made the contract unattractive in its current form. (Reporting by Krishna N Das; Editing by Gopakumar Warrier)