THE FRIDAY NOTE: Views on the Tesla-SolarCity deal

Tesla Motors Inc (NASDAQ:TSLA) earlier this week proposed to acquire SolarCity (NASDAQ:SCTY) and the views on that transaction range from excitement, through doubt and worries, and to a certain degree of opposition.

In a document dated June 20, Tesla’s board proposes to acquire the US solar energy company in exchange for Tesla stock. It is offering about USD 26.50-28.50 (EUR 23.8-25.6) per SolarCity share. The proposal is subject to the completion of due diligence, the negotiation of definitive transaction documents, and final approval by the Tesla board.

Following the announcement Tesla’s stock fell, while SolarCity’s inched up.

Tesla Motors investors dumped shares today, after the company offered to buy SolarCity https://t.co/97OEoagDBV pic.twitter.com/dTCBKp48K3

— Wall Street Journal (@WSJ) June 22, 2016

A “no-brainer”

Outside its car business, Tesla launched in 2015 the Powerwall home energy storage system and the Powerpack, a battery storage solution for business and utility applications. The acquisition of SolarCity, which started offering the Powerwall immediately after its release, could be seen as a logical next step for Tesla.

The proposed deal will allow customers to buy a Tesla car, a SolarCity solar system and a Powerwall battery, becoming nearly or totally energy independent, at one location.

For Elon Musk, the largest shareholder in both Tesla and SolarCity, it is “more efficient to do it as an integrated system at the sale and at the installation and in terms of just general maintenance and managing the customer relationship [..] it’s quite difficult to create an integrated product if you’re forced to be at an arm’s-length and be two different companies.”

What is more, the visionary Tesla CEO explains, the Powerwall and the Powerpack need to be designed together with the solar system, so it is a one-piece thing.

“And I think SolarCity has got a great future independent of Tesla but, and obviously Tesla does, but being able to integrate things at the product level, at the consumer experience level, at the utility level, at the commercial level it actually makes it easier, not harder. That’s how we’re doing this,” Musk told a conference call on Wednesday.

Sales through Tesla

For some time SolarCity has been limiting growth in order to achieve a cash flow positive position. Musk believes that the company would be a net cash generator, not a cash burner. The solar installer has been facing rising costs per watt, which, the CEO explained, were mainly due to sales costs. When sales go through Tesla, there will be a “dramatic” reduction in these costs.

That idea has been challenged by MJ Shiao, director of solar for GTM Research, who says he does not understand why Tesla and SolarCity couldn't do this through an exclusive partnership. “I like the retail angle in that it makes solar-plus-energy products more visual to the homeowner [...] But Tesla's retail footprint is limited -- how many sales is that truly going to drive for SolarCity?"

Laura Stern, President of Nautilus Solar told SeeNews Renewables there are not very many customers who will realise synergies between the combination of the two companies. “Electric car owners can charge their cars with conventional grid power. Solar owners may have demand for battery storage, depending on the local net metering regulations, but unless the acquisition accelerates driving down the cost of batteries for those home owners who want battery storage, the synergies are limited. The advantage of battery storage for the home should be to arbitrage power pricing from the grid--not to take solar electricity from your roof to store in your car.”

A distraction or the big picture

A 10% decline in Tesla’s stock after the proposal showed that not all see things as Musk does. Probably the biggest worry for Tesla investors is that a deal for SolarCity might distract the company at a time when it needs to focus on the delivery of the Model 3 sedan. UBS analyst Colin Langan says this acquisition is an unneeded distraction and he is not the only one.

I'm afraid I see no obvious synergies in the #Tesla $TSLA #SolarCity $SCTY deal, only distraction and loss of focus. https://t.co/F1SfP0wAXT

— Michael Liebreich (@MLiebreich) June 23, 2016

Tesla was downgraded from "outperform" to "market perform" by stock analysts at Oppenheimer on Tuesday. Colin Rusch said there could be serious shareholder disagreement over the deal. Adam Jonas at Morgan Stanley cut his price target on Tesla Motors and downgraded it to "equal weight" from "overweight".

The difficulties that SolarCity's been having, do not help. As pointed out by Colin Rusch and Gorden Lam, investors are likely to see the transaction as a bailout for the solar company. Lam, however, told Forbes that “in the short run this does not look good, but in the long run, everything becomes more cost efficient.”

“I think investors that view Tesla only as a car company may be losing site of the big picture,” Lam, who started his Marketocracy fund in 2007, was cited as saying at http://www.forbes.com/sites/kenkam/2016/06/23/top-quartile-equity-manager-supports-teslas-acquisition-of-solar-city/#65c4e79314c8.

Reuters said that Joe Dennison a portfolio manager of Zevenbergen Capital Investments, also views the deal as a natural evolution of Tesla’s mission to turn transportation into a sustainable business. Zevenbergen Capital holds roughly 0.4% of Tesla’s shares outstanding, according to the article.

Tesla's bid for solar panel maker Solar City is a "no brainer": Musk https://t.co/nwhbPwKrl8 pic.twitter.com/yEDN6tyImf

— Reuters Top News (@Reuters) June 21, 2016

“The world does not lack for automotive companies,” Musk said. “The world lacks for sustainable energy companies.”

(USD 1 = EUR 0.899)

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