More Than Money at Stake in Tesla’s SolarCity Deal

The vote on Tesla Motors’ proposed merger with SolarCity is drawing nearer. That means Tesla shareholders have quite a dilemma to sort out.

Though Elon Musk, Tesla and SolarCity’s chairman and largest shareholder, has termed the proposal a “no-brainer,” the reality, at least for Tesla shareholders, is far more complex.

From a strictly financial perspective, the deal is something Tesla shareholderscan do without. Tesla, of course, has significant ongoing cash needs without the additional burden from SolarCity. Though Tesla showed $3.2 billion in cash on its balance sheet as of June 30, that money is expected to burn quickly as Tesla prepares to bring the Model 3 sedan into production. Capital expenditures alone are expected to total $1.75 billion for the second half of the year.

Adding the struggling solar-panel developer to the mix would make this problem worse. SolarCity spent $766 million on operating expenses last year, nearly twice as much as its total revenue. Through June of this year its expenses hit $265 million, 42% more than its revenue in the first two quarters. Worse still, SolarCity has more than $3 billion in long-term debt on its books. Tesla has said it would need to raise fresh capital before the year is out, despite raising nearly $2 billion in equity financing in May.

Avoiding that burden would give Tesla more financial flexibility to launch the Model 3 on time and on budget. A successful Model 3 launch is essential for Tesla to justify its valuation, and that task becomes more urgent as legacy auto makers roll out new competition for the Model 3.

Tesla-SolarCity Merger Would Make Tesla’s Business Model Worse, Not Better

Tesla shareholders would be better off voting down the company’s merger with SolarCity, in part because combining the two companies would likely cause Tesla’s expenditures to explode.

The merger looks like a loser from a Tesla shareholder’s perspective, mostly because the addition of SolarCity would wear on Tesla’s financial well-being, as the company’s capital expenditures alone are expected to balloon to $1.75 billion by the second half of the year.

Adding the hulking, money-bleeding solar-panel developer to the mix would inevitably compound this problem.

SolarCity spent nearly $800 million on operating expenses in 2015, the Wall Street Journal reported Monday, essentially dwarfing its total revenue by more than half. The solar panel maker is an albatross on shareholders’ necks: It currently has more than $3 billion in long-term debt on its books; and its expenses hit $265 million by June.

SolarCity Is Being Sued for Intellectual Property Theft

In a lawsuit filed in San Francisco on Monday, the parties accused SolarCity of gaining undue advantage of Cogenra’s Shingling technology that helps in manufacturing high-efficiency commercially viable solarpanels.

SolarCity and its subsidiary Silevo misappropriated Cogenra’s trade secrets, manufacturing processes, and other intellectual property to give themselves a competitive advantage and head start in developing shingled-cell solar modules, Cogenra said in the lawsuit.

Tesla’s European Troubles Continue

When it comes to Tesla Motors (NASDAQ:TSLA), we continue to wonder if the company’s growth story is fully intact. One place where the company continues to struggle is Europe, where Model X sales are off to a poor start and Model S sales continue to lag last year. Now that the European Alternative Fuels Observatory has issued its latest monthly figures, we can get a glimpse of how Tesla’s Q3 is shaping up.

According to EAFO since the last update, 842 Model S units have been sold. However, that compares to 1,123 units in the same time frame for 2015, a drop of just over 25%. Through this update, Tesla has sold over 8,300 Model S vehicles, but as the chart below shows, this number continues to lag last year, and the divide is growing.

WHY TESLA’S SOLARCITY BID WILL FAIL

Gigafactory, Model 3 Implications

Tesla’s blog notes its Gigafactory-produced Powerwall home battery system dovetails with SolarCity-produced solar panels. But Goldfarb objects to “the hypothetical connection in that solar can charge a home battery during the day, and this then can be used by the electric vehicle at night — or both batteries could be used to sell back to the grid.” But solar generally doesn’t produce enough to power a home, he says. “And you can’t store power in your car battery during the day because the car is usually not there.”

Goldfarb also says the $4 billion Gigafactory in Nevada has been “a huge bet” and has experienced delays. “It is hard to see how its battery model will be profitable,” he says.

Musk says, according to Vox, that a SolarCity deal will not affect Tesla’s plan to sell its $35,000 Model 3 starting in 2017. But Goldfarb says the margins in this part of the market will be very tight. “General Motors has been promising a late-2016 launch of a 200-mile range Chevrolet Bolt EV, electric car,” he says. “Moreover, the electric car market is crowded in the midprice range. Nissan, Ford, BMW, VW, Fiat, Mercedes, Kia, Mitsubishi and Smart all produce cars in the segment.”

Not Mass-Market Suited

Given the above-noted factors, Goldfarb says Tesla’s mass-market and SolarCity-takeover ambitions appear out of line with Musk’s track record as a master and visionary. For example he’s been out in front of the self-driving revolution (though the self-driving car “is really just a toy right now, and this market is very crowded, too,” Goldfarb says). Tesla can and should focus on what it does best: high-end electric cars, Goldfarb says. “Tesla owners love their cars,” he says. “They should. These are wonderful automobiles.”

How Long Will It Take SpaceX to Return to Space?

Every minute that SpaceX must spend figuring out why its rockets are blowing up, instead of launching them, is time the company is not collecting revenue, not earning profits, and not making progress toward Elon Musk’s goal of amassing enough money to finance a manned mission to Mars. So long as SpaceX is kept busy figuring out the SpaceXplosion phenomenon, there can be no relaunch of a “used rocket,” and no test launch of the company’s new Falcon Heavy rocket, either.

Meanwhile, SpaceX’s website continues to describe the company as “profitable and cash-flow positive” — even after two explosions and a combined seven months of inactivity over the past 15 months. The longer SpaceX remains grounded, though, the more questionable those claims will become.

Pointing at SpaceX explosion, ULA says Pentagon contracts shouldn’t just go to lowest bidder

The recent explosion of a SpaceX rocket should raise concerns about going with the lowest bidder on sensitive national security launch contracts, the chief of the United Launch Alliance wrote in a letter to top Pentagon officials this month.

Tory Bruno, ULA’s chief executive, urged the Air Force to postpone the deadline for bids, saying it should take time to explore the impact of SpaceX’s rocket failure while also taking into account both companies’ experience and past performance.

The Pentagon should have particular reservations, Bruno wrote, given that SpaceX has now had two of its Falcon 9 rockets blow up, which he said “serve as a reminder of the complexity and hazards intrinsic to space launch services.”

“This strategy defies both law and logic and puts hundreds of millions of taxpayer dollars and Warfighter mission needs unnecessarily at risk,” he wrote.

The letter is the latest salvo in one of Washington’s most contentious contractor feuds, one that has pitted a pair of the world’s most powerful defense contractors against a brash billionaire looking to shake up a calcified market by offering launches far more cheaply. And it’s the most glaring example yet of a competitor going after SpaceX for its pair of explosions.

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