Elon Musk’s desire to create a clean energy and transport powerhouse – a key plank of his recently aired Master Plan part 2 – is one step closer after independent board members approved Tesla’s offer to acquire SolarCity on Monday.
The all-stock deal values SolarCity at about $US2.6 billion – which is roughly half what the company was worth just a year ago – with SolarCity stockholders to get a 0.11 share of Tesla for each share of SolarCity, valuing them at $25.83 a share, according to Friday’s closing prices.
The new offer is below that proposed by Tesla in June, but as Greentech Media reports, it coincided with SolarCity’s “preannounced” Q2 operating metrics for 2016, in which it lowered its annual guidance for the second time this year.
Both companies’ share prices fell on news of the deal, with SolarCity stock shedding 7.4 per cent on Monday to close at $US24.72 – a sign, says Reuters, that most shareholders are betting the deal will be approved. Tesla shares closed down 2 per cent at $US230.01.
If the deal is approved by shareholders – a result is expected on this by the fourth quarter – it would double Tesla’s workforce to nearly 30,000 and create a solar, battery storage and transportation powerhouse – the world’s only integrated sustainable energy company, according to Musk.
The merger is also expected to deliver cost efficiencies for Tesla of $US150 million in the first year – a “conservative figure”, the EV and battery maker says – mostly driven by sales and marketing efficiencies, overhead savings and manufacturing efficiencies.
Speaking on an investor call on Tuesday morning, Musk said the deal could also see the Gigafactory workforce double to nearly 10,000 people and triples in output.
Tesla also suggested in the call that around three million customers visit its retail locations every year, offering a great opportunity to both companies for sales channel rationalisation.
But the establishment of an integrated solar and battery storage offering was highlighted as one of the key drivers for the merger, as well as the offer of more integrated products and grid related services to residential and commercial customers.
Tesla also suggested it could potentially look to develop an inverter product in future, further securing its position as a one-stop solar and storage shop.
On the negative side, WSJ notes that the merger would also “tie together two money-losing entities, dependent on borrowing from the market,” adding a good dose of potential risk to balance out the opportunity.
It said that “some analysts were skeptical of the deal’s value for Tesla, saying that buying an unprofitable solar company may not be the best financial move for Tesla, which up to now has primarily been an auto maker.”
But Musk, who owns more than 20 per cent of both companies and is the largest shareholder in both, is confident of the deal’s success. As he said earlier in July, he expects two-thirds of shareholders to approve the deal.
“The whole point of the merger is to get rid of the conflicts of interest,” he said. “It’s really all part of solving the sustainable energy problem… That’s why we are all doing this, to accelerate the advent of a sustainable energy world.”
Here’s what others have said about the deal…
– “It’s a bailout,” said Jesse Pichel, an investment banker at Roth Capital Partners. “SolarCity has had a hard time raising money. Tesla solves that problem.”
– “It’s how big fortunes are made,” said Lynn Jurich, chief executive of rival Sunrun Inc. “People who are willing to bet big and have a vision will be rewarded.”
– “When two highly leveraged companies that have to raise huge amounts of capital merge, you don’t get a stronger company. You get a larger company that combines the weaknesses of both smaller companies,” said Erik Gordon, professor at the University of Michigan Ross School of Business.
– “At the end of the day, they have a tremendous amount to overcome with respect to the Model 3 launch,” said Consumer Edge analyst James Albertine, via CNBC. “The production line as we understand it has not broken ground yet. So to take this on, I think is going to beg a lot more questions.”
– “Over time I think it will be a smart move, I think it is taking analysts and investors quite a bit of time to digest why it is a smart move,” said Baird analyst Ben Kallo in an interview with CNBC. “Solar carries with it a tough reputation, to be nice. We have had a lot of bankruptcies in the space, SolarCity has not been a clean story from an execution standpoint. …Investors and analysts, as they have dug in, and done more homework, over time they have begun see how this could be additive to Tesla.”