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Private vision, public market

14 Sep 2016 By Richard Beales, Kevin Allison

It hasn’t been the best September for Elon Musk. His privately held SpaceX rocket company suffered a dramatic explosion earlier in the month. On Tuesday noted short-seller Jim Chanos repeated his disdain for the entrepreneur’s planned acquisition by his $30 billion Tesla Motors venture of the $1.8 billion SolarCity. To cap it all, investors seem increasingly persuaded by Chanos’ arguments rather than Musk’s own vision.

The potential merger of the electric-car maker and the solar-panel installer, both about a fifth owned by Musk, was revealed in June by Tesla but only inked on July 31 and announced a day later. It was and remains a headscratcher. The Tesla chief executive and SolarCity chairman sees complementary roles for the two in a “vertically integrated sustainable energy company.” Investors, however, had thought Tesla was a car manufacturer and didn’t applaud when the deal was first mooted.

Tesla's offer for SolarCity

Once the deal was formalized, though, shareholders seemed initially to assume Musk and his cohorts had found ways to overcome both strategic questions and the governance complexities introduced by the entrepreneur’s roles in both firms, family relationships and a shortage of truly independent board members at SolarCity. The day the deal was unveiled, the target’s shares closed only just below the price implied by the exchange ratio in the all-stock deal. The arb spread, as it’s called, was a mere 2.3 percent.

After a while, though, more investors started betting that the deal might not happen. Following Chanos’ latest comments, the discount at which SolarCity shares trade relative to the theoretical value of the transaction widened to exceed 20 percent.

The short-seller reckons the combined company would burn through $1 billion a quarter. As he suggests, the constant need for capital is a risk – and a bigger one than either company runs individually, though both lose money. Moreover, Tesla has ambitious targets of its own, notably to produce 500,000 vehicles a year by 2018 – nearly 10 times last year’s total.

Shareholders, who have to approve the deal, can be forgiven for being torn between backing Musk and wanting Tesla to achieve carmaking scale without distractions before embarking on any grander plan. For now at least, stoked by the likes of Chanos, the numbers suggest the latter view is in the ascendant.


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