Tesla Shares Fall After Goldman Downgrade (TSLA, SCTY)

Electric carmaker Tesla Motors Corp.’s (TSLA) shares declined by 3.6% to $201 after analysts at investment bank Goldman Sachs Group Inc. (GS) downgraded the stock from Buy to Neutral and cut their price target for the stock to $185 from $240. The downgrade comes after Tesla reported record-breaking car deliveries for the third quarter. (See also: Tesla Reports Biggest Quarterly Sales)

The “incremental risk” associated with capital deployment in the merger between Tesla and SolarCity Corp. (SCTY) is one of the reasons for Goldman Sachs’ downgrade. The firm projects increased free cash flow and leverage for the combined entity. For example, they estimate a free cash flow of between $2.4 billion to $2.5 billion for next year and leverage figures that are 6.6 times greater than that for this year. The other reason for the downgrade is related to possible delays that the company might incur while launching the Model 3, its electric car for the masses. (See also: Behind Tesla’s 1,173% Rise In 10 Years)

Despite the downgrade, the investment firm has a relatively positive take on Tesla’s near-term prospects. It is forecasting a loss of 59 cents per share for the car maker, when the consensus is for the company to report 93 cents in losses this year.

Goldman’s estimates for the long-term, however, are an opposite of the consensus estimate.

Given its bearish stance on Model 3 deliveries, Goldman Sachs has a 48 percent lower than consensus on average for the 2017 to 2019 period. This is because the investment firm expects Tesla to increase expenses related to sales and marketing and research. Other analysts expect the car company to turn profitable next year.

To be sure, the firm’s downgrades for Tesla should be taken with a grain of salt. The investment bank upgraded Tesla a day before underwriting its secondary offering this May. An analyst from Devonshire Research said the downgrade had become “an after-hours laughing matter.”

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More Than Money at Stake in Tesla’s SolarCity Deal

The vote on Tesla Motors’ proposed merger with SolarCity is drawing nearer. That means Tesla shareholders have quite a dilemma to sort out.

Though Elon Musk, Tesla and SolarCity’s chairman and largest shareholder, has termed the proposal a “no-brainer,” the reality, at least for Tesla shareholders, is far more complex.

From a strictly financial perspective, the deal is something Tesla shareholderscan do without. Tesla, of course, has significant ongoing cash needs without the additional burden from SolarCity. Though Tesla showed $3.2 billion in cash on its balance sheet as of June 30, that money is expected to burn quickly as Tesla prepares to bring the Model 3 sedan into production. Capital expenditures alone are expected to total $1.75 billion for the second half of the year.

Adding the struggling solar-panel developer to the mix would make this problem worse. SolarCity spent $766 million on operating expenses last year, nearly twice as much as its total revenue. Through June of this year its expenses hit $265 million, 42% more than its revenue in the first two quarters. Worse still, SolarCity has more than $3 billion in long-term debt on its books. Tesla has said it would need to raise fresh capital before the year is out, despite raising nearly $2 billion in equity financing in May.

Avoiding that burden would give Tesla more financial flexibility to launch the Model 3 on time and on budget. A successful Model 3 launch is essential for Tesla to justify its valuation, and that task becomes more urgent as legacy auto makers roll out new competition for the Model 3.

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Tesla-SolarCity Merger Would Make Tesla’s Business Model Worse, Not Better

Tesla shareholders would be better off voting down the company’s merger with SolarCity, in part because combining the two companies would likely cause Tesla’s expenditures to explode.

The merger looks like a loser from a Tesla shareholder’s perspective, mostly because the addition of SolarCity would wear on Tesla’s financial well-being, as the company’s capital expenditures alone are expected to balloon to $1.75 billion by the second half of the year.

Adding the hulking, money-bleeding solar-panel developer to the mix would inevitably compound this problem.

SolarCity spent nearly $800 million on operating expenses in 2015, the Wall Street Journal reported Monday, essentially dwarfing its total revenue by more than half. The solar panel maker is an albatross on shareholders’ necks: It currently has more than $3 billion in long-term debt on its books; and its expenses hit $265 million by June.

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Tesla Shareholders File Lawsuit Over SolarCity Buyout

Tesla Motor Inc.’s proposed acquisition of American energy services provider SolarCity Corp. – worth $2.6 billion – has run into troubled waters and could be deferred.

On Monday, Sept. 19, the company revealed that SolarCity’s acquisition could potentially be delayed as Tesla shareholders had filed lawsuits. The four lawsuits against the automaker has been filed by four different shareholders over the imminent buyout and alleges that Tesla’s board members breached fiduciary duty as revealed in a Securities and Exchange Commission (SEC) filing.

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This shows why Tesla-SolarCity is a ‘crazy’ merger, Jim Chanos says

Jim Chanos called Tesla Motors’ proposed merger with SolarCity”crazy” and “the height of folly” while outlining his short positions in the stocks on Tuesday.

The short-seller from Kynikos Associates estimated the combined company would burn through $1 billion per quarter and “constantly need access to capital markets.” He described SolarCity’s business model as “just plain uneconomic.”

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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

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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.

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‘Quintessential Insider Deal’: Taxpayers Finance Family Ties of 2 Failing Green Companies

Author: Kevin Mooney

Source: Daily Signal

Grassroots conservative activists who run a reboot of Ronald Reagan’s political action committee want to know why the government allows one failing company to buy another failing company while both get taxpayer subsidies.

They also want to know why corporate executives with friends in high places have not been subjected to more scrutiny after receiving a multimillion-dollar compensation package at a time when their company remains heavily subsidized at taxpayer expense.

“This is the quintessential insider deal,” one taxpayer advocate said in an interview with The Daily Signal.

Citizens for the Republic, a nonprofit, grassroots lobbying group, posed the two questions in a July 15 letter to members of the House and Senate as the lawmakers left Washington for summer recess.

The group calls on Congress to investigate the CEO and the chief technology officer of SolarCity, a renewable energy company based in San Mateo, California. The two SolarCity executives happen to be brothers; Lyndon and Peter Rive also happen to be first cousins to Elon Musk, chairman and co-founder of SolarCity.

Musk is also chairman and founder of Tesla Motors Inc., an electric car company based in Palo Alto,California. In June, Tesla Motors offered to buy SolarCity.

Musk is the largest shareholder in both companies, according to Securities and Exchange Commission filings.

The proposed $2.8 billion deal would provide Musk and his cousins, the Rive brothers, with an additional $700 million in Tesla stock, according to media reports.

Musk anticipates a “supermajority of shareholders” will approve his bid, The Wall Street Journalreported. The 45-year-old business mogul was expected to unveil a new master plan for the combined companies as early as this week.

“Elon Musk has been getting bailout after bailout to prop up his companies that never succeed,” Diana Banister, partner in Shirley & Banister Public Affairs and executive director of Citizens for the Republic, told The Daily Signal in an interview, adding of Musk:

Why is the government bailing him out and giving him taxpayer money when last year he said hedoesn’t need subsidies? Musk is bailing out his own company with taxpayer dollars. That’s how much of a racket this is. Musk is getting subsidies for one company and then using those subsidies to bail out another company that’s also subsidized.

Questioning Compensation Packages

Its letter to Congress is an extension of Citizens for the Republic’s Sunlight Project, set up in 2015 “to monitor and expose corruption and cronyism at the nexus of government and business.”

Sunlight Project keeps tabs on Musk’s corporate enterprises at the Stop Elon From Failing Again website, unveiled in June. The site says it is devoted to “challenging the waste, fraud, and abuse of taxpayer money by the failures of Elon Musk.”

The Daily Signal obtained a version of the July 15 letter addressed to Sen. Lamar Alexander, R-Tenn., a member of the Senate Appropriations Committee. It reads in part:

As heads of grassroots organizations devoted to fiscal responsibility and government accountability, we urge Congress to launch an immediate investigation of Lyndon Rive, the chief executive officer of SolarCity, and his brother Peter Rive, the company’s chief technology officer, for their $128.9 million cumulative compensation package while the company is simultaneously receiving more than half a billion dollars in federal direct grants and just as much, if not more, from state and local governments.

The letter is signed by Banister and Craig Shirley, her partner in Shirley & Banister Public Affairs and chairman of Citizens for the Republic, which is a nonprofit under 501(c)(4) of the tax code.  Shirley is the founder, chairman, and CEO of the pair’s public relations and marketing company, where Banister is president.

Also signing the letter were David Williams, president of the Taxpayers Protection Alliance, a nonprofit focused on government’s effects  on the economy and tax burden, and Seton Motley, president of Less Government, a nonprofit seeking to reduce government’s power and  safeguard First Amendment rights

Reagan originally established Citizens for the Republic in 1977, three years before he won the presidency. Conservative activists rebooted the political action committee in 2010, with Banister and Shirley as board members. Shirley is the author of three books on Reagan, including one on his unsuccessful 1976 campaign for the White House.

‘Taking a Hard Look’

With Congress on recess, the political action committee has not received any official response to its letters regarding Musk and the Rive brothers.

Banister, however, said she received encouraging feedback from a few key lawmakers, including Sen. Orrin Hatch, R-Utah, chairman of the Senate Finance Committee, and Rep. Jeb Hensarling, R-Texas, chairman of the House Committee on Financial Services.

Banister said she sees an opportunity for lawmakers to revisit and review the merits of the Solar Investment Tax Credit if they press ahead with investigations into the Rive brothers and their compensation package.

“Once congressional investigations get started, they could possibly start a conversation about public policy reforms that could better protect taxpayer interests,” Banister said. “This means taking a hard look at the Solar Investment Tax Credit.”

The tax credit was extended as part of the 2015 omnibus spending package that passed Congress late last year. The PAC’s letter says:

The solar leasing industry is propped up by the Solar Investment Tax Credit, which subsidizes every panel that they lease. The [credit] was intended to provide subsidies for the growth of renewable technology, but we are concerned that it is being used to pad the paycheck of solar executives, like the Rive brothers.

The letter claims SolarCity “lost more than 50 percent of its value” over the past year, but persists because of government subsidies and the intervention of Musk.

“Doesn’t this all seem a little incestuous and little corrupt?” Banister asked. “I’d say it’s actually extremely corrupt, and it’s time for Congress to start paying attention.”

‘Corporate Favoritism’

The Daily Signal contacted both Tesla Motors and SolarCity, inviting both companies to comment on the letter calling for congressional investigations. Tesla has not yet responded.

In an email, Will Craven, SolarCity’s director of policy and electricity markets, said the “compensation numbers” are “tied to ambitious goals that will take years to achieve, and will only be paid out should SolarCity hit those goals, for example a stock price of $400 per share.”

Craven also referred to a blog post from Lyndon Rive, SolarCity’s CEO, addressing the compensation issue. In it, Rive writes:

My own compensation is based on this principle: If SolarCity does not significantly increase value for shareholders and employees and deliver a better experience for customers, then I do not deserve more than my base salary, and that’s the only pay I will receive.

“If this wasn’t a green energy company, you would have both Democrats and Republicans screaming about this,” Williams, the Taxpayers Protection Alliance president, told The Daily Signal, adding:

This is the quintessential insider deal. But because this involves green energy you have the left overlooking corporate welfare and corporate favoritism because it’s something they like. But if it involved a big bank or some other company, the left and the right would be up in arms about this.

Tesla is the subject of a Securities and Exchange Commission investigation of the fatal crash of its Model S car. The driver was using the car’s autopilot when it crashed.

The investigation appears to be focused on finding out whether the crash was material to Tesla’s $2.3 billion secondary offering May 18, a few weeks later. Continue reading “‘Quintessential Insider Deal’: Taxpayers Finance Family Ties of 2 Failing Green Companies”