In a surprise announcement made moments ago, California automaker Tesla Motors [NASDQ:TSLA] has announced its intent to acquire SolarCity [NASDAQ:SCTY] in a move that will result in TeslaMotors becoming a one-stop shop for renewable energy storage, photovoltaic solar panels, and electric cars.
Announced shortly after the close of business on Wall Street, Tesla Motors CEO Elon Musk — who also happens to be Chairman of SolarCity — called the proposed merger as being a logical step for both companies, since they already operate in the same spheres. Talking on a surprise press call following the announcement, Musk said that Tesla’s intention would be to merge SolarCity’s business into its own brand, turning Tesla Motors into a three-pronged business.
“It would be a one-stop shop,” Musk said. “Customers could come into a Tesla store and after a short chat have all their energy needs taken care of from solar to energy storage and an electric car too.”
According to Tesla’s official offer to acquire Solar City, a copy of which was made available to the press after the announcement, Tesla proposes to acquire all outstanding stock in SolarCity in exchange for Tesla common shares at an exchange ratio of 0.122x to 0.131x shares of Tesla common stock for each share of SolarCity common stock, based on a current stock valuation of between $26.50 and $28.50 per share for SolarCity.
“We believe that our proposal offers fair and compelling value for SolarCity and its stockholders, while also giving SolarCity’s stockholders the opportunity to receive Tesla common stock at a premium exchange ratio,” the letter explains.
In order for the merger to continue, Tesla says that shareholders for both companies will need to vote in favor of the proposed acquisition. Given Elon Musk’s position as both CEO and majority shareholder of Tesla Motors — and his role as Chairman and shareholder at SolarCity — Tesla has announced he has decided to recuse himself from having a voting say in the proposal. Also recused from voting is major Tesla and SolarCity investor Antonio Gracias of Valor Equity Partners. A member of both Tesla’s board and SolarCity’s board, Gracias will also not vote on the merger.
At the time of writing, Musk owns 21 percent of Tesla Motors and 22 percent of SolarCity. And while Musk is only Chairman of the latter rather than CEO, we should remind readers that honor goes to Elon Musk’s Cousin, Lyndon Rive.
When asked if this meant Tesla was no-longer an automaker but an energy company, Musk replied that given the need for energy generation, storage and transportation to be joined up, he has always viewed Tesla Motors as more than an automaker. Essentially, he argued, SolarCity has made it easier than ever before for people to harvest the energy of the sun and power their homes using clean, renewable energy. Tesla’s Powerwall makes it easier than ever before to store excess energy generated for times when it is needed. And Tesla’s range of electric cars make it possible to use that energy to travel, emissions free.
The proposed merger is common sense for all, he reiterated, noting that acquiring SolarCity would allow Tesla to extend its sustainability mission to cover the harvesting, storage and use of clean, renewable energy.
Careful not to discuss too many details, Musk dodged any questions concerning management restructuring of both companies, hinting that it was too early to make any firm predictions at the current time. If approved however, Musk made it clear that photovoltaic solar, energy storage, and automotive parts of Tesla would work together alongside one another “without barriers between them”.
“We would be the world’s only vertically integrated energy company offering end-to-end clean energy products to our customers. This would start with the car that you drive and the energy that you use to charge it, and would extend to how everything else in your home or business is powered. With your Model S, Model X, or Model 3, your solar panel system, and your Powerwall all in place, you would be able to deploy and consume energy in the most efficient and sustainable way possible, lowering your costs and minimizing your dependence on fossil fuels and the grid,” Tesla said in its press release announcing the deal.
“We would be able to expand our addressable market further than either company could do separately. Because of the shared ideals of the companies and our customers, those who are interested in buying Tesla vehicles or Powerwalls are naturally interested in going solar, and the reverse is true as well. When brought together by the high foot traffic that is drawn to Tesla’s stores, everyone should benefit.”
It’s worth noting at this point that neither Tesla Motors nor SolarCity are debt free at the moment. Indeed, Solar City’s losses stood at $2.56 a share at the end of last quarter, worse than the $2.31 loss predicted by Wall Street. Consequentialy, following its Q1 earnings call back in May, stock lost 20 percent of its value, tumbling to just $17.82 a share. Since then, SolarCity shares have recovered a little, hovering at $21.19 per share at the close of business today, but they’re far from the heady $84.96 they were worth in SolarCity’s peak in February 2014.
Tesla’s balance sheet at the end of the last quarter was a little smaller than SolarCity’s standing at $2.13 per basic share using the GAAP method of accounting. Despite this however, Musk said during the conference call that should the merger go ahead, the net effect of the acquisition would leave SolarCity “almost debt free”.
While the news may have caught some unawares, rumors about Tesla Motors acquiring SolarCity have prevailed for several months, with some analysts predicting that a merger between the two unprofitable companies would allow them to not only become stronger, but far more powerful in both the automotive, energy storage and renewable energy business.
Given SolarCity is Tesla’s preferred energy partner in the U.S. for sale and installation of its Powerwall energy products, the merger seems to make sense on all sides, especially if, as Musk promised during the conference call, the acquisition will not impact on either Gigafactory construction or Model 3 production goals.
Yet there’s something of a fly in the ointment, namely stock price. That’s because while SolarCity has already risen 23 percent in after-hours trading, Tesla’s share price has plummeted more than 13 percent at time of writing. While it’s still a long way from its February low-point of $151 per share, it’s clear that not everyone shares Tesla’s belief that a merger of the two firms is the best choice right now.
Do you own TSLA or SCTY stock? Do you welcome the proposed merger? Or will you be voting against it? Or perhaps you’re a customer of either firm keen to see what happens next?
Leave your thoughts in the Comments below.
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