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.
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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.