Tesla (TSLA) Announces Plan to Acquire SolarCity (SCTY) to form an Elon Musk (Not So) Super Group

Joel Anderson  |

A little over a year and a half ago, I wrote an article about the potential synergy between SolarCity (SCTY) and Tesla (TSLA) that I cleverly (or not) titled “SolarCity (SCTY) and Tesla (TSLA): Joined at the Elon Musk.” At the time, I was referring to the fact that Musk was talking openly about how he anticipated being able to connect SolarCity solar panel systems to batteries manufactured by Tesla, boosting the value of a home solar system considerably, and making that value no longer dependent on net metering.

However, news on Tuesday that Tesla would be purchasing the troubled SolarCity in an all stock deal would certainly stretch that idea of synergy to the breaking point. In a press release on Tesla’s site, the deal was purported to potentially create “the world’s only vertically integrated energy company offering end-to-end clean energy products to our customers,” something that certainly sounds pretty good.

The cynic in me, though, isn’t necessarily buying this. Sure, it’s possible that this represent a genuine belief that one’s car and home represent an “end-to-end” approach to clean energy. But it also seems pretty possible that Elon Musk, the Chairman and CEO of Tesla, is using one company he owns the largest single stake in to bail out another company he owns the largest single stake in. In fact, aside from shoring up SolarCity’s financial troubles, it seems this deal doesn’t do much good for either company.

Two Unprofitable Companies Join Forces

SolarCity has run into a fair bit of trouble of late. Shares had plunged over 60% over the last 12 months, and the company’s money troubles were starting to mount. The company’s cost of sales continued to be considerable, and its debt levels were starting to get investors worried. Especially when you consider the collapse by SunEdison (SUNE), there was real concern that SolarCity might similarly start to buckle under the weight of the debt it built up while it was rapidly expanding.

In a call with reporters, Musk said that “This is something that we have been thinking about and debated for many years, but the timing seemed to be right now.” He was referring to Tesla expanding its battery production, but he just as easily could have been referring to the price they were getting SolarCity at given its recent troubles.

Certainly, the battery business is the piece that links these two companies. Energy storage has long stood as the key to making home solar economically viable, and a separate battery business helps Tesla’s prospects for long-term success by expanding their scope beyond their cars alone. However, how exactly the electric car business is related to the rooftop solar business, beyond sharing a battery system, is a lot less clear.

What’s more, SolarCity and its issues with debt and high cost of sales would seem to imply that the ideal buyer would be one with deep pockets and enough profits to help give the company plenty of runway to play out its ambitious plans for expansion. Tesla certainly doesn’t have the same scale of issues as SolarCity, but the two have a lot in common. Neither is profitable, both are paying a lot for their revenue, and both appear to be playing out aggressive expansion plans with a lengthy timeframe for going into the black.

Tesla is currently sitting on about $3 billion of debt. So is SolarCity, though that’s a much more troubling number for a company with a valuation at around $2 billion rather than $20 billion. However, Tesla would be taking on a lot more debt while further diluting its shares in an all-stock deal.

Is this Cynicism or Ingenuity on Musk’s Part?

Ultimately, it’s entirely possible that Tesla has a plan to really leverage value out of SolarCity for its shareholders. The company’s battery business clearly overlaps with SolarCity. However, too much about this deal raises some serious questions about what motivated the deal. Namely, if not for Elon Musk’s rather large stake in both companies, it’s hard to see a deal like this happening. It’s not as though there are a lot of other home solar companies planning mergers with car makers. Granted, no other car maker is positioning itself as a major maker of lithium-ion batteries, but it’s still pretty fishy.

Or, at the very least, it looks pretty fishy. If I were a shareholder in Tesla, I might not be especially pleased to see that my Chairman and CEO was spending close to $3 billion to acquire another company of which he’s Chairman in an all-stock deal. I’d be more concerned upon learning that company has $3 billion in debt, and is currently the focus of serious questions about its long-term viability. And even more so when I consider that Tesla itself is a capital-intensive business without any near-term prospects for positive free cash flow, and only recently finished another capital raise.

This is either an extremely bold move towards a really new type of company, or an extremely cynical one that’s taking advantage of Tesla’s shareholders to bail out SolarCity. Only time will tell, but making a move this brazen really puts an abnormal level of pressure on Elon Musk to succeed. Should he fall short of the already sky-high expectations for both Tesla and SolarCity, this deal is likely to reflect very poorly on him. That said, Musk has always seemed to have a pretty healthy appetite for both risk and ambition, so this move seems entirely in line with most of his career this far. I’m pulling for him to succeed, even if I have trouble being anything but skeptical about this move.

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