That SolarCity Spread Spells Trouble For Tesla

With SolarCity owing money to SpaceX — Musk’s unlisted rocket developer — and insiders, and Tesla needing cash itself, the electric-vehicle maker’s highly valued shares are critical. In a rational world, holders of those shares would consider SolarCity’s wide discount alongside the fact that, despite this apparent bargain, no other bidders have emerged, and conclude Tesla is clearly overpaying and they should vote the deal down.

One twist they have to contend with, though, is that, in the absence of near-term profits, the value of Tesla’s stock is inextricably bound up with belief in the abilities and vision of Musk himself. While the decision to buy SolarCity may have dimmed that aura somewhat, a potential collapse at SolarCity if the deal doesn’t go through could be even more damaging — one of those damned if you do, damned if you don’t situations. Nothing is simple once you’ve entered the Muskplex.

Elon Musk’s Fortune Plummets $779 Million As Tesla-SolarCity Flops

Still, many analysts warn Musk’s entities have to find a firm base of support before they can be counted on the long term.

Ross Gerber, chief executive officer of Gerber Kawasaki Wealth & Investment Management, for one is souring on Tesla’s fortunes even as his company holds a $5 million position in Tesla and has recently been selling shares.

“He’s got guts, I’ll give him that,” Gerber told reporters, adding: “He really pushes it out on his companies, but Elon could implode.”

4 Reasons To Bet Against Tesla

But should a potential investor or customer engage their System 2 before buying Tesla stock or a Tesla vehicle, the case for buying the car — which is expensive, attractive, and seems to work fine as long as the driver can keep the battery charged – is far stronger than the case for buying the stock.

This comes to mind in considering the ginormous cash crunch facing Tesla due to its $2.6 billion merger with SolarCity — the solar energy service run by his cousins. (I have no financial interest in the companies mentioned in this post).

This merger offers investors four compelling reasons to bet against Tesla.

1. Strategic Rationale Is Weak

2. Musk Is Gripped By Delusions of Grandeur

3. Combined Companies Can’t Grow Out of Their Cash Conundrum

4. Tesla Has Weak Corporate Governance

Tesla & SolarCity: This Deal’s Getting Worse All The Time

Elon Musk failed to disclose his purchase of SolarCity stock.

Musk bought 570,000 shares of SolarCity stock on February 11, evidently near the time he discussed the possibility of a merger with cousin Lyndon Rive.

The per-share purchase price ($17.56) was significantly below the implied valuation of SolarCity stock in the merger; hence, Musk will realize a profit of several million dollars if the merger is approved.

Again, EnerTuition’s article has an excellent and nuanced discussion of the stock purchase, and the questions it raises, so I skip over it here except to note Musk’s stock purchase further taints a deal that already has a bad odor.

If you are a Tesla shareholder (or, indeed, a SolarCity shareholder), and deciding how to vote on the merger, would any of these topics be important?

A budget for CapEx needed to achieve volume production of the Model 3;

Any change in 2016 delivery guidance;

Any change in the number of Model 3 deposits since April;

The yield on Tesla’s 32,000 Model X deposits;

Details about Model S order backlog and demand;

Details about Tesla Energy sales;

Details about Tesla Energy margins;

Details about Gigafactory sub-suppliers;

Details about the “safety stock” Panasonic is requiring Tesla to pay for;

Update on whether Tesla still plans to begin Model 3 production in July 2017;

Update on whether Tesla still forecasts production of at least 100,000 Model 3 car in 2017.

If you believe any of this information might be useful in considering the merger proposal, too bad for you. The S-4 is silent about all this.

Tesla’s Extravaganza Of Fraud-Risk Indicators

Audit firms are required by their professional standards to consider the possibility that the financial statements contain fraudulent misstatements and/or omissions. The auditing standards contain a number of indicators, or “flags,” that should alert auditors to the risk of fraud. PwC is likely beginning its client retention and planning for year-end audits right about now.

PwC client Tesla (NASDAQ:TSLA) is throwing off an extraordinary plume of fraud-risk indicators that is visible from deep space; red flags, orange flags, floating pink flags at high tide. As an artistic achievement, this colorful extravaganza might make Christo and Jeanne-Claude green with envy. Somehow we don’t think PwC will have the same reaction.

Yesterday, Elon Musk lost a rocket and $780 million

Thursday started badly for Elon Musk when one of his SpaceX Falcon 9 rockets exploded on the launchpad, days before it was set to take a payload into orbit. Things got worse when Mark Zuckerberg discovered his $95 million satellite was sitting on top of the rocket, and took to Facebook to express his “deep disappointment.”

But as it turns out, blowing up a multi-million-dollar rocket was not Elon’s most expensive mistake yesterday.

As Bloomberg reports, share movements and regulatory filings related to Tesla and SolarCity, two of Musk’s other companies, cost him $779 million yesterday. The stock in both those companies (which are set to merge) took a sharp drop yesterday, with Tesla down 4% and SolarCity dropping by 9%. According to Fortune, the drop was due to cash concerns in Tesla, and ongoing worries from investors over Tesla’s merger with SolarCity.

Tesla Motors discloses $1.1 billion in third-quarter cash needs

“During the third quarter, we will be using substantial amounts of cash in connection with conversions of our 2018 Notes and we could pursue other actions to reduce our outstanding balance of convertible notes, which could require further outlays of cash,” Tesla wrote in the filing with the U.S. Securities and Exchange Commission.

If the two third-quarter payments are subtracted from the mid-year cash balance, Tesla would have $2.1 billion left over. The company on Wednesday told analysts it planned $1.75 million in the second half of the year on capital expenditures.

Tesla declined to comment beyond the filing.

Stop Elon From Failing Again

THE ONE STOP DATABASE ON STOPPING ELON MUSK