Elon Musk hosted a question-and-answer session Tuesday to talk up the merits of Tesla's (TSLA) pending $2.6 billion acquisition of SolarCity SCTY. But in talking up SolarCity as a business, the call could have actually created as many doubts about the deal on one side as it did to relieve skepticism from the other.
The Tesla/SolarCity combination has been the target of scrutiny from the day it was announced, as critics have accused Musk of using one company in which he holds a large stake to bail out another. Musk is CEO of Tesla and chairman of SolarCity and a major shareholder in each, with his cousin Lyndon Rive serving as CEO at the solar panel installation firm.
SolarCity is losing money, burdened with more than $3.4 billion in debt, and seems to be losing access to credit markets. In late August, after the takeover agreement was announced, SolaCity sold $100 million worth of a $124 million bond offering to Musk and other insiders at a rich 6.5% rate, an indication that demand for the offering from the general public was tepid at best.
Given the issues with SolarCity's business, and the lack of any abundant near-term synergies between a solar panel company and an automaker, Tesla investors have been asking if SolarCity is worth the potential balance sheet stress and management distraction. Tesla has an ambitious agenda of its own even without M&A, including moving its more affordable Model 3 sedan to production next year, and according to Oppenheimer estimates could need to raise upward of $12.5 billion by the end of 2018 to fund both SolarCity and Tesla's plans.
Musk used the call to try to ease those concerns, saying that SolarCity is much healthier than it appears. "Really I see zero chance of SolarCity going bankrupt," Musk said in response to an analyst question. "Zero." SolarCity will add $1 billion in revenue to the combined company in 2017 and $500 million in free cash to the combined balance sheet over the next three years, Tesla said, portraying its merger partner as a contributor instead of an albatross post-deal.
The CEO's message to investors was that given the challenges Tesla has overcome in the auto market, the company should have earned some level of trust. While "a few naysayers," Musk said, have continuously predicted Tesla's downfall, "if they have a batting average of zero, you should really question whether their future predictions are going to be better."
It seems premature for Tesla to take a victory lap, and the buyer's SolarCity financial projections would seem to be very optimistic. But if the statements are taken at face value the bigger question is why shareholders in the SolarCity that Musk is describing would want to accept the Tesla offer. Conventional wisdom since the deal was announced has been that winning SolarCity shareholder approval would be the easy vote, given the company's perilous position and the benefits of being part of a bigger entity with greater access to capital markets.
But the all-stock bid, in which SolarCity investors would receive 0.11 a Tesla share for each share owned, is currently priced at less than half of SolarCity's 52-week high and well below its all-time high reached in early 2014. Tesla stressed that the $500 million in positive cash generation over the next three years was separate from any merger-related cost cuts and synergies. If that's the case, the question isn't whether Musk is bailing out SolarCity. It would be whether or not he is trying to get it on the cheap.
Merger proponents would likely point out that because it is an all-stock deal SolarCity holders will have a chance to share in the upside. But is that upside and the benefits of being part of a bigger company able to better cross-sell various green products really enough to justify taking less than half of what SolarCity's per share value was as recently as January?
Investors will have additional data to weigh prior to having to make a decision, with SolarCity scheduled to announce quarterly results on Nov. 9 ahead of a Nov. 17 shareholder vote. Shareholders in both companies should take a long look at how rosy SolarCity's outlook appears before deciding how to vote on the deal.