Calling the pairing a “blindingly obvious” one to make, Tesla Motors CEO and Elon Musk yesterday proposed to pay $2.8 billion in an all-stock deal to buy SolarCity, where Musk is the chairman and, with 22% of the stock, controlling shareholder. He owns 21% of Tesla.
“The merger would allow Tesla customers, who drive electric vehicles, to harness the power of the sun in an ‘end-to-end clean energy product’ as soon as next year, Tesla said,” Anita Balakrishnan reports for CNBC. “It builds on an existing partnership between the two companies under which SolarCity uses Tesla battery packs as part of its solar projects, according to Tesla.”
“Both companies have been growing fast, but have also consumed enormous amounts of cash to pursue their goals,” report Michael J. de la Merced and Peter Eavis for the New York Times. “Of the two, SolarCity — where … [Musk’s] cousin, the co-founder Lyndon Rive, is chief executive — has been the more troubled, buffeted by changes in the regulations on the solar energy industry. While an important federal tax credit was extended, local policies have cut into the savings that solar providers have promised.”
In a conference call with reporters, Musk said: “The world does not lack for automotive companies. The world lacks for sustainable energy companies.”
In the first of five bullet-pointed reasons for the deal, a blog post by “The Tesla Team” addresses its argument for the merger to the consumer inside every investor: “We would be the world’s only vertically integrated energy company offering end-to-end clean energy products to our customers. This would start with the car that you drive and the energy that you use to charge it, and would extend to how everything else in your home or business is powered. With your Model S, Model X, or Model 3, your solar panel system, and your Powerwall all in place, you would be able to deploy and consume energy in the most efficient and sustainable way possible, lowering your costs and minimizing your dependence on fossil fuels and the grid.”
Forbes contributor Chuck Jones, however, says “it may be beneficial to be vertically integrated and there will probably be some synergies but this sounds like marketing spin with not much in dollars behind the rationale. It will also strain Tesla management as it is taking on the risky Model 3 and Gigafactory manufacturing ramp.”
The NYT’s de la Merced and Eavis point out that “analysts have commented that Tesla’s main business may be in batteries, particularly as it builds out its $5 billion Gigafactory near Reno, Nev.” And analysts reacting to the bid in a story by Bloomberg’s Dana Hull were prone to thinking that the acquisition would be a “distraction,” as Oppenheimer & Co. analyst Colin Rusch put it.
“Investors expect Tesla to keep all its focus on completing the gigafactory and on quickly ramping up production of Model 3 in 2018,” says Salim Morsy, an analyst with Bloomberg New Energy Finance. “Both of these goals are existential for Tesla. A SolarCity acquisition doesn’t help execute these critical milestones.”
And those investors expressed their chagrin by sending Tesla shares skidding “7.6% to $203 at 5:21 p.m. in after-hours trading, even as shares of SolarCity have soared 23% to $26.07,” reports Ben Levisohn for Barron’s. Getting inside sellers heads, he writes: “Tesla’s supposed to be the automaker of the future. It’s supposed to be focusing its energy on getting ready to build its mass market Model 3. Instead, it’s trying to be…what?”
The deal is subject to approval of “a majority of disinterested stockholders” of both companies.
Musk, “who has borrowed money and shuffled funds among his companies, recused himself from voting on the deal at the Tesla board meeting at which it was approved and will do so for any vote on the SolarCity board as well, the offer letter said,” Mike Ramsey, Lynn Cook and Mike Spector report for the Wall Street Journal. Rive and Antonio Gracias, a director on the boards of both companies, also recused themselves.
“As of yesterday, Musk personally owns 22,160,370 shares of SolarCity. So if the respective boards of each company approves the acquisition, Musk would personally reap $587,249,805 to $631,570,545,” Johana Bhuiyan reports for Recode.
Now that’s a sunny forecast.