Tesla, The Cartel, And The Big Short

Summary

  • The “cartel” of institutional ownership has a powerful tool with which to support Tesla’s stock price: not selling the stock.
  • The situation is not dissimilar from that of subprime mortgage-backed securities circa 2007.
  • Increasing unit losses as the company scales up its sales volume indicate that Tesla, in truth, has increasingly negative gross margins.
  • Increasing negative gross margins and long-tailed service costs mean that Tesla, with or without Solar City, is doomed.
  • An “amazing” Q3, year-end bonuses for the fund managers, and then; the crunch?

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Tesla Sued Because ‘Insane Mode’ Isn’t Insane Enough

According to 126 Tesla customers, the Model S sedan P85D performance version can eat dirt, because its “insane mode” isn’t as insane as the company claims. Bloomberg reports that the customers, who live in Norway, have now filed a lawsuit against Elon Musk’s automotive company. They’re looking for “unspecified reimbursements” because they believe the car’s […]

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Musk’s vision at stake in Tesla shareholders’ vote on SolarCity merger

SolarCity’s fate now lies squarely in the hands of Tesla Motors and its shareholders.

A 45-day window in which SolarCity could consider other offers beyond Tesla’s $2.3 billion merger bid closed on Wednesday night, and no other investor or company put a proposal on the table.

That wasn’t entirely surprising. After all, 15 potential buyers or investors looked at SolarCity earlier this summer, while the solar energy company was hammering out the terms of Tesla’s merger offer and trying to see if anyone else would top the electric vehicle maker’s bid.

None did.

Now the big question is whether Tesla’s shareholders buy into CEO Elon Musk’s vision for creating a renewable energy juggernaut that combines electric vehicles with solar energy and battery storage.

Shareholders from both companies still have to vote on the proposed merger. The date of the votes haven’t been set, but it could be as early as October.

Most analysts think the deal will go through. They say many Tesla investors support Musk’s renewable energy vision and are likely to go along with his strategy.

They also tend to downplay the concerns that arose from the regulatory filing about the cash crunch that both companies are facing. Tesla needs to pay $422 million to some of its bond holders by the end of the month, and both companies need to raise billions in new funding to finance their ambitious plans.

The news recently has been better on the financing front. Tesla, which had $3.25 billion in cash on its books at the end of June, reached an agreement this month to borrow up to $300 million from Deutsche Bank to fund its vehicle leasing program.

SolarCity earlier this week raised $305 million in a deal with five institutional investors and an investment fund advised by George Soros.

That fundraising will cover only a portion of the companies’ financing needs, but it shows that their ability to raise funds remains viable.

Still, the worries persist on Wall Street. Since the deal was finalized on Aug. 1, Tesla’s stock is down by 13 percent. SolarCity shares have tumbled by 34 percent.

As a result, a deal that was worth $2.6 billion when it was announced now is worth about $350 million less.

In the deal, SolarCity shareholders will receive Tesla stock worth $22.59 at today’s prices. But because of the liquidity concerns and uncertainty over shareholder approval, SolarCity’s shares are trading at $17.50 – a steep 23 percent discount to the value the Tesla offer places on the shares.

Normally, the discount would be just a few percentage points.

One of the more skeptical analysts following the deal, Gordon Johnson of investment firm Axiom, pegs the odds of the merger passing at 50-50. Johnson, who has a sell rating on SolarCity’s stock and thinks it could fall as low as $7, said Tesla “failed to consider whether another solar company was a better fit,” and noted that none of the three potential suitors who had more extensive contact with SolarCity were willing to make a counter offer, according to a regulatory filing by the companies late last month.

“With a number of solar vendors available currently, at arguably depressed prices … Tesla failed to consider if any other solar companies offered more favorable synergies,” Johnson said in a research note.

Musk, who owns more than 20 percent of the stock in both companies and is SolarCity’s chairman, has argued that no company is a better fit for Tesla than SolarCity. With a commanding market share in the rooftop residential market, Musk has said that SolarCity, run by his cousin, Lyndon Rive, offers the best opportunity to link Tesla’s battery storage capabilities with a leading solar energy installer.

Some analysts wonder if Musk is taking on too much at one time.

“We see a lot more that can go wrong than can go right,” said Jeffrey Osborne, an analyst at Cowen & Co. “The company, while fundamentally well positioned for the long term, has a material amount of execution risk over the next 12 to 18 months.”

Tesla is developing its Model 3 sedan, which will sell for as little as $35,000 and will be its most affordable model, by far. As it moves to ramp up production of the Model 3, Tesla also is opening its battery gigafactory in Nevada.

SolarCity, for its part, is pushing to open its solar panel factory in South Buffalo, which will be the biggest in the Western Hemisphere, with production scheduled to start by the end of June as the company rolls out a new solar roofing product.

“The SolarCity acquisition only adds an additional layer of complexity at a crucial time when the company should be focused on the gigafactory ramp and Model 3 launch,” Osborne said. “We see the potential for delays in the introduction of the Model 3, ramp of the Gigafactory and integration of SolarCity, leading to increased cash burn levels.”

Cash is such a concern because neither Tesla nor SolarCity is profitable, although Musk, in a memo to employees this month obtained by Bloomberg News, urged them to cut costs and deliver “every car we possibly can” to push the vehicle maker closer toward generating more cash than it uses. Hitting that milestone would put Tesla in “a far better position to convince potential investors to bet on us.”

Together, the two companies will have about $5 billion in debt between them. And because neither one has a positive cash flow, they will have to raise billions in new capital to meet their ambitious plans, from opening the battery gigafactory and the Buffalo solar panel factory, to ramping up production of the Model 3.

The big question now, though, is how much interest Tesla shareholders have in approving the deal.

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Tesla-SolarCity deal confronting four hurdles

It has been anything but smooth sailing for Tesla Motors and its $2.3 billion bid to buy SolarCity.

The merger, intended to advance Tesla co-founder and CEO Elon Musk’s vision of creating a renewable-energy powerhouse, has received a lukewarm reception on Wall Street and is facing legal challenges that could delay the deal. And unlike most corporate mergers, it’s not a certainty that the deal will win shareholder approval, especially at Tesla.

Here’s a look at four hurdles that the deal is facing:

 

1. Shareholder lawsuits

The deal is being challenged by four separate lawsuits. While shareholder lawsuits over mergers are common and usually don’t hold up deals, the litigation surrounding the SolarCity acquisition could be different.

Tesla warned that the lawsuits, alleging that the electric vehicle maker’s directors breached their fiduciary duty in approving the deal, could delay the acquisition in a regulatory filing Monday, contending that the cases do not have merit.

Even so, the lawsuits are likely to delay important shareholder votes on the deal until mid-October at the earliest. A hearing on the lawsuits, including one that is seeking an injunction to block the deal, won’t be held until Oct. 18, likely delaying those votes until the Delaware court takes action. Analysts had expected the shareholder votes to take place as early as next month.

 

2. SolarCity’s cash needs

SolarCity already has said that its lenders held back on providing essential financing after Tesla’s interest in buying the solar energy company was first disclosed in late June.

When SolarCity tried to raise $124 million from investors in late August, it offered an unusually high 6.5 percent interest rate on its 18-month debt offering. Even then, Musk and his cousins, SolarCity executives Lyndon and Peter Rive, ended up buying $100 million of the debt.

Its financing picture brightened last week when SolarCity raised $305 million by selling future cash flows from some of its solar projects to a hedge fund advised by billionaire George Soros and secured an 18-year loan from a syndicate of five lenders. Credit Suisse analyst Patrick Jobin estimated that the latest deal reduced SolarCity’s financing costs by almost a full percentage point, compared with a similar offering earlier this year.

SolarCity constantly needs to raise more money from investors to fund a business model that relies on selling rooftop solar energy systems to homeowners at no upfront costs.

“There is a bit more urgency for the Tesla-SolarCity deal to go through sooner so that SolarCity can get the access to capital that it needs,” Barclays analyst Brian A. Johnson said in an Aug. 31 research note, written before the latest fundraising.

 

3. Investor confidence

Stock in SolarCity, which is building a solar panel factory at RiverBend in South Buffalo, now trades for $4 a share less, or 19 percent less, than what Tesla is offering – a gap indicating that investors are uncertain the deal will be completed. If investors are confident that an acquisition will go through, the shares of both companies typically trade within a few percentage points of the price being offered.

 

4. Shareholder support

Analysts generally think Tesla shareholders will back the merger, largely because many of them believe in Musk’s long-term vision for building a company that combines solar power with electric vehicles and battery storage.

And given the gap between Tesla’s offer and SolarCity’s current stock price – $18.35 at Tuesday’s close – SolarCity shareholders are expected to approve the merger.

But approval by Tesla shareholders isn’t considered a sure thing. Some investors and analysts have raised concerns that the deal would give Tesla a company that is losing money and faces major financing needs at a time when it is in the midst of its own costly initiatives, including the rollout of its more affordable Model 3 sedan and the launch of its battery gigafactory in Nevada.

“Recent disclosures highlight SolarCity’s cash needs, which we think may cause pause among Telsa shareholders,” Morningstar analyst Andrew Bischof said.

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Hedge Fund Manager Who Spotted Fraud at Enron Calls Tesla ‘The Anti-Amazon’

Asked if Musk might not do with Tesla what Jeff Bezos has done with Amazon  —which continued to be one of the the market’s best-performing stocks despite being unprofitable until very recently—Chanos rejected the idea. “This is anything but,” Chanos said of Tesla. “This is the anti-Amazon.”

The big difference between Tesla and Amazon: While Amazon may have lost money on the bottom line, it always had enough revenue coming in that it never needed to go back to the capital markets to raise outside funds since it went public almost two decades ago, Chanos said. That’s far from true for Tesla.

Tesla is going to “continue to lose lots of money,” Chanos said. “And continue to need more and more capital.”

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Exploding The Myth Of Tesla Safety

Summary

  • Oh, those cherished Tesla myths: Supercharger superiority. Operating costs. Reliability.
  • Dare we challenge another? Yes, dare we do. Bubslug dives deep into the statistics to shatter the myth of Tesla safety.
  • No, his is not the final word. But the preliminary statistics on fatalities aren’t pretty, and Autopilot may make it even worse.
  • Meanwhile, Tesla is making deals like never before. Hurry on down to the Sales Center lot before September ends.
  • The Q3 deliveries will impress. The Q3 financial statements? Well, you can’t have everything.

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Tesla’s Next Broken Promise

The fantasy of a “lights out” plant—an automated plant so lacking in human presence that it could operate in the dark—has long been discussed in theoretical terms. In the 1980s Roger Smith, the late GM chief executive, pushed his manufacturing executives to begin to “robotize” assembly plants. Just as influential has been Toyota’s manufacturing system, which relies on low-tech principles such as just-in-time supply chain, standardized work procedures, and employee involvement in continuous improvement and efficiency to dramatically drive down manufacturing costs. GM developed its own version, the Global Manufacturing System, and for a time operated a collaboration on manufacturing methods with Toyota in the same building in Fremont that Tesla operates today.

State-of-the-art car factories rely on assembly-line workers as well as programmable machines. With a typical assembly line producing around 60 vehicles an hour or roughly 1,000 a day on two eight-hour work shifts, a line might, at the outside, be able to manufacture more than 250,000 vehicles a year. (Several North American automotive assembly plants operate on three shifts of six-and-a-half hours. The biggest produce more than 500,000 vehicles a year.) The two-shift total assumes production goes flawlessly. Factor in supplier parts shortages, machinery breakdowns, quality problems, labor issues and changes to vehicle design, and annual production drops to the more typical 100,000 to 150,000 vehicles per assembly line per year.

Those numbers show how hard a task Musk set for his company when he promised to ramp up production to 500,000 cars two years from now. The CEO may yet come up with some new surprise to keep his company in the game, but this deadline is destined to be missed.

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