To Elon Musk, Tesla’s $3 billion deal to take over SolarCity seems obvious. In his Tuesday conference call explaining the all-stock proposal, Musk used the word “obvious” or “obviously” a total of 25 times.
But the deal is far from obvious to anyone who’s not the largest shareholder of both companies, CEO of Tesla and chairman of SolarCity (aka Musk). SolarCity investors may enjoy the stock price boost, but Tesla investors have been selling; the auto maker’s stock is down 9% so far on Wednesday.
Moreover, nearly every Wall Street analyst is some combination of confused and disappointed with the deal. Most still are fans of Musk’s long term Tesla vision but are unable to see any substantive synergies between building cars and installing solar panels. Combining two companies with massive annual losses only increases the burden on both Tesla Motors and SolarCity to raise more money. Here’s a roundup of scathing reviews for Elon Musk’s “obvious” deal…
Barclays analyst Brian Johnson: “While no doubt the Tesla bulls will hail the combination as visionary, we believe the assumption of another $2.6bn of debt to fold in a solar company with limited synergies and uncertain growth/cash prospects only reinforces our negative view of TSLA… the combined entity is likely to magnify the losses and cash burn that both were seeing individually… We are skeptical of the benefits.”
Oppenheimer analyst Colin Rusch: “We believe investors are likely to view this transaction as a bailout for SCTY and a distraction to TSLA’s own production hurdles. Given what we view as significant operational and integration challenges over our forecast horizon, we believe stepping to the sidelines is warranted.”
Morgan Stanley analyst Paul Coster: “Absent a detailed explanation (at this time) we are struggling to see brand, customer, channel, product or technology synergies, much as we would be hard-pressed to see synergies in the merger of an Oil company and a conventional auto OEM.”
UBS analyst Colin Langan: “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… SolarCity and Tesla have worked together on a battery offering, and there may be some potential future synergies on the SG&A front, but we note Elon Musk was unaware of how many Tesla customers have solar – implying customer acquisition synergies may not be the primary focus.”
Raymond James analyst Pavel Molchanov: “Because Elon Musk is the largest shareholder of both Tesla and SolarCity, as well as CEO of Tesla and Chairman of SolarCity, it goes without saying that this proposal carries the potential for conflict of interest. To minimize that risk, Musk formally recused himself from board voting on both the Tesla side and the SolarCity side. But let’s not be naïve: the proposed merger could not possibly be initiated or realized without his backing.”
Deutsche Bank analyst Rod Lache: “Tesla shareholders have sought to invest in an innovative and disruptive vehicle/mobility company, whose business offers potential for exponential growth. And Tesla vehicle owners primarily buy the vehicle because it’s one of the best, most advanced vehicles available. They are generally not looking for an end-to-end energy solution. Overall, while we see potential for synergies, and we acknowledge that the acquisition of Solar City would only increase Tesla’s outstanding shares by 8-9%, we believe that Tesla Investors will generally view this development as a negative, as it could produce a distraction while management would benefit more by focusing on their impressive growth plans.”
PiperJaffray analyst Alexander Potter: “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. However, with the Model 3, TSLA is already subjecting itself to one of the most ambitious (and probably one of the least achievable) production ramps in automotive history. Integrating SCTY wouldn’t make this process any easier.”
Author: Brian Solomon