Summary
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.
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.”
Read more "Hedge Fund Manager Who Spotted Fraud at Enron Calls Tesla ‘The Anti-Amazon’"Summary
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.
Read more "Tesla’s Next Broken Promise"This month, SpaceX’s Falcon 9 rocket blew up, destroying Facebook’s $195-million-dollar satellite.
This event eerily reminds us about the failed Falcon 9 launch just 15 months earlier, where SpaceX’s rocket blew up as it approached orbit and destroyed $118 million dollars of NASA cargo. This is the second failure in succession, reminding the public of the “risks of spaceflight.”
Except that “risk of spaceflight” is just rhetoric by the government – the other orbit launching company, United Launch Alliance (ULA), has experienced a 100 percent success rate in launches over a course of 10 years, compared to SpaceX’s reckless six years in business.
Read more "Elon Musk: The Great Congressional Swindler"ALEXANDRIA, VA – It was revealed this week that the Senate Finance Committee and the House Ways and Means Committee have launched a probe into tax incentives paid to solar companies, sending letters containing a series of questions to seven U.S. and international solar companies including Elon Musk’s beleaguered SolarCity.
“This investigation is an important step in cleaning up what has become a disgraceful abuse of taxpayer dollars in the solar industry,” said Diana Banister, executive director of Citizens For The Republic (CFTR). “The Senate Finance Committee and the House Ways and Means Committee are right to begin holding the likes of SolarCity accountable for the egregious waste of taxpayers’ money. But more must be done. CFTR is proud to continue its work in exposing the fraudulent solar subsidy network and will continue to push lawmakers in taking action against these crimes.”
Solarcity, has been propped up by more than $2.5 Billion in government subsidies, $1.5 Billion of which comes from the Solar Investment Tax Credit (SITC). The SITC is a 30% subsidy to every solar panel sold in America and was extended in last year’s Omnibus package. The credit, intended to help individual homeowners buy solar panels, instead lines the pockets of Solarcity’s executives, including Musk and his cousins, the Rive brothers.
“Elon Musk has bilked the American taxpayer out of more than $4.9 Billion in subsidies, grants, and government sweetheart deals. With that, he has produced a solar financing company that’s in financial free fall. A car company whose average vehicle sells for more than $100,000 and a rocket company that lost $118 million of cargo in one explosion,” said Banister. “It’s time for congress to stop taking money from hardworking Americans and giving it billionaires and their friends.”
Citizens for the Republic (www.CFTR.org) is a conservative 501(C)(4) grass roots lobbying organization dedicated to promoting the ideology and political philosophy of Ronald Reagan. Reagan established the original CFTR in 1977. In 2010, a group of Reagan stalwarts re-launched the organization. Its board includes Chairman Craig Shirley and Director Diana Banister.
To schedule an interview with Diana Banister, please contact Brendan Bradley with Shirley & Banister Public Affairs at (703) 739-5920 or bbradley@sbpublicaffairs.com.
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