Electric Kool-Aid acid test

21 June 2016 By Jeffrey Goldfarb

Tesla’s offer to buy SolarCity cements Elon Musk’s status as a mad scientist. The electric-car company he runs has bid up to $2.8 billion for the solar-panel installer he also backs. The idea of a renewable-energy roll-up is at best way too early and at worst just plain bonkers.

Musk owns about a fifth of both companies, is a co-founder and chairman of SolarCity and runs $33 billion Tesla Motors. A third Musk enterprise, rocket maker Space Exploration Technologies, has been buying debt in SolarCity, according to a report earlier this year in the Wall Street Journal. The merger proposal raises the financial intricacy toward the level of the circuitry in the SpaceX launch vehicle.

At the high end of the exchange ratio range proposed by Tesla, it would hand over shares worth $28.50 apiece for SolarCity, a company whose stock was trading at about $85 little more than two years ago. But investors don’t seem to consider that a bargain. In the hours after the idea of combining the two companies was unveiled, Tesla lost more than $4 billion of market value.

At least overlapping directors are withdrawing and leaving the decision to disinterested board members and eventually shareholders of both companies. Based on the market reaction, though, the obvious interpretation is that the offer looks like a way to prop up SolarCity’s stock at the expense of the higher-flying Tesla.

In arguing for the deal, Tesla envisions a one-stop, clean-energy shop selling cars, batteries and the power of the sun. And yet it’s hard to see any reason to buy all three from one place, even though Tesla claims that its drivers are “naturally interested” in going solar. Any design and manufacturing overlap – in batteries, say – probably affords only marginally better financial benefits than the “shared ideals” Tesla also is touting.

In reality, each company faces unique problems. SolarCity is burning cash as it struggles to find as many customers as quickly as it had hoped. Tesla, meanwhile, is trying to meet the ambitious goal of producing 500,000 vehicles a year by 2018. With capital expenditures approaching $2 billion last year, it’s no surprise the carmaker is also cash-flow negative. Whether there are unspoken motives or it’s the overwrought creation of an excitable mind, combining the two is the wrong sort of innovative engineering.

 

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