Elon Musk received mixed news from proxy advisory firms on Friday, Nov. 4, as one group recommended approval and one recommended rejection of Tesla Motors Inc.'s (TSLA) planned $2.6 billion acquisition of SolarCity Corp. (SCTY) .
Institutional Shareholder Services recommended shareholders back the plan at a Nov. 17 vote, while Glass Lewis & Co. came out against the deal.
The opinions of these advisory firms are seen as significant because more passive mutual funds and other institutional investors often rely on ISS and other proxy advisory services when deciding how to vote. In Tesla's case top holders Fidelity Management & Research, owner of 13.69%, T. Rowe Price Associates, 7.07%, and Vanguard Group Inc., 3.29%, would be expected to look closely at the recommendation.
Musk and other insiders have recused themselves due to conflicts and Tesla has a relatively small retail investor base - perhaps less than 10% of the total - meaning the vote will come down to large institutional holders. A third proxy firm, Egan-Jones Ratings Co., as of press time had not published any public comments.
Tesla's planned deal for SolarCity has come under criticism in the months since it was announced due to the companies' cross ownership, SolarCity's financial troubles and the lack of obvious synergies between a solar panel maker and an automaker. Tesla has an ambitious agenda even without M&A, including bringing its more affordable Model 3 to market, and Oppenheimer analysts have estimated the company could need to raise upwards of $12.5 billion by the end of 2018 to fund both SolarCity and Tesla's plans.
But Tesla CEO Musk, a major shareholder in both firms and chairman of SolarCity, has argued that the deal is necessary if Tesla is to advance its goal of being an integrated sustainable energy company, and has argued that Tesla's balance sheet can handle the added burden. Musk, speaking on CNBC on Friday, seemed pleasantly surprised by the ISS recommendation. The Glass Lewis report was not published prior to his appearance on television.
ISS in a report obtained by The Deal, a sister publciation of TheStreet, acknowledges the potential risks of the transaction, but said that "it appears reasonable to assume" Tesla is paying "a low to no premium" to buy SolarCity, adding that "it seems likely" that Tesla, a $30 billion market cap company, "could bridge a financing gap, albeit at a high financing cost," if conditions deteriorate.
Glass Lewis countered that a combination of lack of independent oversight, concerns about the deal process and the overall "high-risk, non-core" nature of the acquisition makes it a bad bet. "In our view, this complex array of interconnected board rooms, questionable lending arrangements and flatly non-strategic capital allocation practices collectively contributes to a problematic narrative around Mr. Musk's perceived ability to heavily influence key strategic and financial decisions with seemingly few checks and balances," the firm said in a report obtained by The Deal.
Glass Lewis also expressed concerns that the purchase amounted to a bailout of SolarCity, saying "we flatly disagree" that SolarCity's cash position is strong. "Stripped from the pretense of creating a fully-integrated renewables retailer serving a loosely framed end-market, we believe non-affiliated Tesla investors should be concerned the proposed tie-up of Tesla and SolarCity mostly amounts to thinly veiled bail-out plan," the firm wrote.
Tesla in recent weeks has rolled out a high-profile campaign to talk up the benefits of the merger, leading some to speculate that the company could be nervous about the upcoming shareholder vote.
The company last Friday unveiled a line of new solar shingles planned for after the deal closes, an event short on details that seemed more designed to talk up the benefits of Tesla and SolarCity working together than it was designed to sell roofs. On Tuesday Musk held a question and answer session with analysts to explain his rational for doing the deal.
ISS also brought up the perceived danger of shareholders rebuking Musk's vision. Tesla, which boasts a market cap more than twice that of Fiat Chrysler Automobiles (FCAU) despite only generating a fraction of Chrysler's sales, is priced more based on investor belief in its long-term plan than it is on current results.
ISS in its report said that "some investors raised the issue of the intangible risk posed by a vote of no confidence on a visionary leader." To some, it seems, there is as much risk in voting against the deal as there is voting to approve it.
-- Ron Orol in Washington contributed to this report