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Wall Street Has Some Questions About Elon Musk’s ‘Blindingly Obvious’ Clean Energy Deal

published Jun 22nd 2016, 9:04 am, by Luke Kawa and Tim Hlavacek

(Bloomberg) —Elon Musk stared at the sun and envisaged a clean energy behemoth.

“Blindingly obvious” was how the Tesla Motors Inc. chief executive officer and chairman of SolarCity Corp. described the plan to combine the two companies.

The proposed deal values SolarCity at a premium of up to 35 percent relative to Tuesday’s closing price. The currency that would be used to facilitate this transaction — Tesla stock — underscores a weakness that the combined entity will face: a lack of cash on hand to finance growth.

While a merger of Musk’s firms may seem a natural evolution, not all analysts are convinced the acquisition is a good deal for Tesla’s shareholders, even while others believe the automaker would be acquiring SolarCity for cheap.

As of 9:00am ET, shares of the electric vehicle maker were trading at $195.10, down 11.2 percent.

Here’s what Wall Street is saying about the possible deal:

Patrick Jobin, analyst at Credit Suisse Group AG

Given the intense skepticism of the residential solar space, the regulatory risks and vociferous consumption of capital (SCTY needs ~$2b this year), combined with the limited synergies in our view, we believe the announcement will be met with resistance from TSLA shareholders…

SCTY may be paralyzed without access to the capital markets for corporate-level fundraising (aggregation facilities) or even Tax Equity during the pending acquisition (this was the cause of massive issues that arose at Vivint Solar during the pending acquisition by SunEdison). SolarCity needs to raise capital in these markets over the next 6 months, a lengthy board evaluation and shareholder approval process could be detrimental to SCTY.

Alexander Potter, analyst at Piper Jaffray & Co.

We think this potential deal makes a lot of strategic sense. By attempting to produce a full suite of consumer products that produce, store, and consume energy, TSLA is demonstrating once again how ambitious its long-term strategy really is. Big-thinking investors will probably like this approach, as it shows why TSLA’s market cap could eventually far exceed “plain vanilla” peers in the automotive industry – none of whom have the guts to expand outside their own industry, in our view.

Pavel Molchanov, analyst at Raymond James & Associates

We are skeptical that the initial terms will prove acceptable to SolarCity’s board. Put simply, we think there is a deal to be made here, but at a higher price point.

Sophie Karp, analyst at Guggenheim Partners

Perception of the possibility of conflict of interest could invite scrutiny, in our view: Given significantly intertwined personal and business relationships between the two companies’ executives, board members and large shareholders, we expect the transaction to be scrutinized by shareholders of both companies, even as conflicted parties have recused themselves from voting on the transaction. We do not see it as a done deal at this point, despite a friendly reception by SCTY management.

Ben Kallo, analyst at Robert Baird & Co.

We believe the transaction would add cross-selling opportunities for Tesla Energy products and TSLA’s vehicles from SCTY’s large customer base…Another proposed acquisition in the solar/energy technology space should help a sector that has been under significant pressure in recent months.

Colin Rusch, analyst at Oppenheimer & Co. 

While we remain bulls on the solar industry, we do not view this acquisition as the best and highest use of TSLA’s capital and human resources given the potential return on capital possible in the electricity industry (typically ~8-9 percent) versus the potential leverage of the TSLA auto platform which we believe could demonstrate ROIC of 15-20 percent or more. We expect a robust shareholder fight over this acquisition centered on corporate governance.


Jeffrey Osborne, analyst at Cowen & Co.

We believe this transaction all comes down to ease of capital formation as well as a few other minor synergies. SolarCity has faced challenges and delays in raising capital, both through tax equity, syndication and other means. Tesla on the other hand has faced less of an issue in this regard. We see a great cultural fit to the deal given both companies already work together – SolarCity is a reseller/installer of PowerWall from Tesla and both companies worked on a utility scale project in Hawaii.


Joseph Spak, analyst at RBC Capital Markets

We do not believe the proposed transaction will be well-received by TSLA shareholders…By owning the asset, we believe TSLA may be trying the investing partner approach they have taken with shareholders and asking them to stick with them for something they potentially didn’t sign-up for. TSLA is billing themselves as a “sustainable energy” company, but we believe they need to do a better job convincing the market as to why this deal makes strategic (and financial) sense.

Emmanuel Rosner, analyst at CLSA

The rationale for this purchase, supposed to create an integrated clean energy company, seems somewhat tenuous to us. We do not expect much cost efficiency from combining the businesses, and sales synergies seem hypothetical and were not quantified. But mostly we worry Tesla’s foray into a completely different business, right at the time it needs to launch its crucial Model 3 and deliver a five-fold increase in output, will amplify execution risks materially further.

Colin Langan, analyst at UBS

We are cautious on the deal as synergies seem limited, it adds complexity, and most importantly it could potentially be an unneeded distraction for TSLA mgt…Some TSLA bulls may be reluctant to see future Model 3 profits diluted. Both groups will need to get up to speed on the different business models, and there are few traditional metrics TSLA shareholders can reliably use to value the deal. We see the differing business models could complicate results for both companies, as well as having a more limited investor overlap (TSLA appears tracked by industrial/tech investors, while SCTY tracked by largely ~energy/tech investors).

Gordon L. Johnson II, analyst at Axiom Capital Management Inc.

As we fail to fully grasp the rationale behind TSLA’s proposed acquisition of SCTY, we believe yesterday’s announcement suggests SolarCity has very little value…The proposed premium to SCTY’s stock price is +30 percent (midpoint) from yesterday’s close, yet SCTY’s stock was $29.6 not two months ago (5/3) & this premium is still -44.6 percent below the stock’s avg. price of $49.6 during ’15 & just +2.8 percent above the stock’s avg. price of $26.7 in YTD ’16 – in other words, if TSLA truly believes in SCTY, then why such a modest premium?

Sven Eenmaa, analyst at Stifel Nicolaus & Co. Inc.

With Tesla’s proposal pointing to an intent to negotiate and complete the combination in an expedited manner, and given the complexity of and recent execution challenges at SolarCity, we see very limited potential for competing bidders to emerge.

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