Tesla-SolarCity merger: How risky is all that debt?

Billions need to be raised

Musk said earlier this month that he expects SolarCity to generate $500 million in cash for Tesla over the next three years. He predicted that SolarCity would add more than $1 billion to Tesla’s revenues next year.

Analysts at proxy advisory firm Institutional Shareholder Services, which recommends that investors approve the merger, estimate that, after the deal closes, Tesla will need to raise between $2.5 billion and $3.5 billion during each of the next two years.

If Tesla can’t raise all the money it needs, some of its ambitious plans could be delayed – or derailed. In one hypothetical scenario that SolarCity management spelled out in an August regulatory filing, if the solar installer struggled to raise new capital it might be forced to cut off funding for the Buffalo solar panel factory to reduce its cash needs by more than $400 million through the end of 2018.

State and company executives have said that’s a worst-case scenario meant to meet legal requirements that regulatory filings warn investors about all potential risks. But it also underscores the importance of raising capital to the companies.

“The issue,” the Institutional Shareholder Services analysts said, “is whether Tesla can handle these needs.”

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Tesla’s stock has had a rough 3 months — and it doesn’t look like things will get better

Tesla shares have declined almost 20% in the last three months, even as the automaker reported a surprisingly profitable third quarter and signaled to Wall Street that it has curtailed its cash burn and could finish 2016 with more money in the bank then expected.

The immediate problem for Tesla is political.

A Trump administration is unlikely to be friendly to electric cars — certainly not as friendly as the Obama administration. Obama was in the White House for almost the entirety of Tesla ascent as both a carmaker and a stock, with Tesla’s IPO taking place in 2010 and the Model S sedan hitting the streets in 2012.

Fortunately, Tesla is far more well established than it was when Obama took office in 2009. CEO Elon Musk’s company will sell a record-number of electric cars in 2016 — probably about 80,000 — and has a market cap of around $30 billion. It can hold on for a while, even if federal policies turn against it. And don’t forget the nearly 400,000 per-orders Tesla has for its forthcoming Model 3 mass-market vehicle.

The worry for the automaker now is that the end of the year and beginning of the next haven’t been happy financial times for the company, historically. Tesla shares have a pattern of sliding through the fourth quarter and continuing their decline into the first, only recovering once it establishes guidance for deliveries for the next year.

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Europe’s Inmarsat is “looking at alternatives.”

On Friday, SpaceX CEO Elon Musk appeared on CNBCand seemed to confirm that the company had found the cause of the September 1st explosion of a Falcon 9 rocket during a test firing.

“I think we’ve gotten to the bottom of the problem,” Musk said, describing the issue as one that had “never been encountered before in the history of rocketry.” Musk didn’t give a detailed explanation, only saying that the failure involved a combination of liquid helium, the rocket’s carbon-fiber materials, and supercooled solid oxygen.

At press time, the company had not published an official statement finalizing the investigation, but Musk’s statements were in line with preliminary findings.

Musk concluded by saying that, with the mystery solved, SpaceX launches would likely resume by mid-December.

But that might not be fast enough for some customers. The Wall Street Journal reported on Thursday that the European satellite company Inmarsat was, in the words of its CEO Rupert Pearce, “actively looking at alternatives” to SpaceX for at least one upcoming satellite launch.

Inmarsat officials seem to be less worried about the reliability of future SpaceX launches than about scheduling problems caused by the halt in launches following the accident. Inmarsat has an early launch slot for its next Global Xpress satellite, part of a plan to provide global wireless broadband, and says it will still launch that craft with SpaceX.

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Another Tesla Crash, What It Teaches Us

Tesla crashed on a test drive while AutoPilot engaged. Nobody got hurt. But the minor incident gives us a plenty to think about.

Earlier this week, I came across a report about a Tesla’s AutoPilot crash. It appeared on Tesla Motors Club’s site, posted by a Tesla fan planning to purchase a car.

The user’s post on the web site’s forum read:

I was on the last day of my 7-day deposit period. I was really excited about the car. So I took my friend to a local Tesla store and we went for a drive. AP [AutoPilot] was engaged. As we went up a hill, the car was NOT slowing down approaching a red light at 50 mph. The salesperson suggested that my friend not brake, letting the system do the work. It didn’t. The car in front of us had come to a complete stop. The salesperson then said, “brake!” Full braking didn’t stop the car in time and we rear-ended the car in front of us HARD. All airbags deployed. The car was totaled. I have heard from a number of AP owners that there are limitations to the system (of course) but, wow! The purpose of this post isn’t to assign blame, but I mention this for the obvious reason that AP isn’t autonomous and it makes sense to have new drivers use this system in very restricted circumstances before activating it in a busy urban area.

Thankfully, nobody got hurt. This post got no traction in the media. No reporter appears to be following it up (except for this publication). This could have been easily filed under the rubric, “minor accidents,” the sort of news we all ignore.

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Elon Musk Is Treating Mars Like It’s a Moore’s Law Problem. It’s Not

A Kink in the Hyperloop

One person who’s confident about the company’s prospects is the author of the Forbes article that put it on the map, Bruce Upbin, who in May joined the company as its vice-president of strategic communications.* Pishevar, who has said that he expects there to be a working passenger hyperloop, somewhere in the world, by 2021, insists that the company is stronger than ever, and he shrugs off the suit, which is ongoing, as a speed bump he doesn’t spend much time thinking about. “I think this idea is bigger than any one person, including myself, and in many ways this is a movement, and anyone that begins to feel like they’re indispensable, or that they’re bigger than the idea, doesn’t fit the culture anymore.” He mentioned famous founder schisms at other tech companies. “The people that we sometimes start our journeys with are not the people we end the journeys with.”

But in Silicon Valley, traditional venture capitalists have for the most part steered clear of the company, finding it too speculative, capital-intensive, and long-term to meet their investing criteria. (An exception, Vinod Khosla, told me he was “only a token investor.”) “Most people thought it was not a scam but a fantasy,” says a seasoned Valley insider who knows the players and who allows that Pishevar’s enthusiasm is genuine: “He believes this bullshit.” The lawsuit hasn’t helped. “No one was taking it seriously. Now it’s like, Who are these clowns?

“He reminds me of Voltaire,” says Kara Swisher, co-founder of Recode and a fan of Pishevar’s, referring to the philosophe’s ever-sunny Candide.“People get attacked and there’s war, and he’s like, ‘All for the best, in the best of all possible worlds.’ ” As we walked around the neighborhood near the company headquarters, Pishevar stopped to hand a few crumpled bills to a homeless man on a crate, and pointed out a retro typeface on the old Sears building. “When I look at cities now, I don’t see them in the present,” he said. “This is the decaying infrastructure of our existing cities. Years from now, none of this is going to be here. New cities are going to rise.”

Maybe the best thing going for hyperloop the concept — if not Hyperloop the company — is that Musk has not abandoned the idea. At last summer’s Code conference, a month before the lawsuit was filed, he said: “I think if the companies that are trying to make it happen now, if for whatever reason that doesn’t work out, then I think, you know, I’ll, I might do something myself in the future.”

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Tesla Confirms–And Ends–Discounts, But Why Were They Offered In The First Place?

In an email sent to all employees, Tesla CEO Elon Musk has confirmed what some customers have been saying online for months; that the company was offering discounts on some new Tesla vehicles despite company policy that all customers pay 100% of the advertised retail price.

This discovery began when a customer posted on Reddit his dilemma: Tesla couldn’t deliver the P90 he purchased until the following week, but the salesperson wanted him to pay for the vehicle in full prior to delivery, or else he wouldn’t honor the discount they negotiated. The thread was shared with Musk on Twitter TWTR +0.17%, who responded immediately that the company never discounts.

It turned out that he was wrong.

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Coal Miner’s CEO Calls Tesla a ‘Fraud’ and Elon Musk Tweets It

For its part, Tesla was downgraded to neutral from a buy rating by Goldman Sachs Group Inc. last week. The company’s shares have dropped as it moves forward with its plan to buy rooftop solar installer SolarCity Corp., which some analysts have deemed a risky bet. Musk is chairman of SolarCity, and his cousin Lyndon Rive serves as its chief executive officer.

Customers who purchase an electric vehicle can claim a $7,500 federal income tax credit and several states offer additional incentives, according to Tesla’s website.

Tesla will let Musk’s tweet “stand as a comment,” spokeswoman Alexis Georgeson said in an e-mail. The Clinton campaign didn’t immediately respond to a request for comment.

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The Only Thing on Autopilot at Tesla Is the Hype Machine

Just over a year ago, Tesla sent out a software update to its cars that made its “Autopilot” features available to customers, in what the company called a “public beta test.” In the intervening 12 months, at least one customer died while the Tesla was in autopilot mode. Cars have crashed, regulators have cracked down, and the headlines proclaiming that “Self-Driving Cars Are Here” were replaced with Tesla’s assurances that autopilot was nothing but a particularly advanced driver-assist system.

Given all this, one might assume that a chastened Tesla would take things more cautiously with its next iteration of autonomous technology. But in a launch event this week, Tesla introduced its Autopilot 2.0 hardware with the promise that all the cars it builds from now on will have hardware capable of “the highest levels of autonomy.”

Tesla’s proof that its new hardware is capable of driving in the “complex urban environment” was a brief, edited video of the system navigating the area around its headquarters near Stanford University in California. Though exciting for enthusiasts who can’t wait to own a self-driving car, the video is hardly proof that Tesla’s system is ready to handle all the complexities that are holding back other companies that have been working on autonomous technology for longer than Tesla. As impressive as Tesla’s system is — and make no mistake, it is deeply impressive — navigating the Stanford campus is a hurdle that even graduate school projects are able to clear.

Tesla’s new sensor suite upgrades what was a single forward-facing camera to eight cameras giving a 360-degree view around the car. It also updates the 12 ultrasonic sensors, while keeping a single forward-facing radar. Yet independent experts and representatives from competitor firms tell me this system is still insufficient for full level 5 autonomy– the National Highway Traffic Safety Administration’s highest rating — which requires more (and better) radar, multiple cameras with different apertures at each position and 360-degree laser-sensing capabilities.

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