Elon Musk was not on the ballot on Election Day. But on Thursday evening shareholders of Musk-backed Tesla Motors ( TSLA) and SolarCity ( SCTY) will cast a vote that can be seen as a referendum on the entrepreneur's grand vision of a green future.
Tesla's $2.6 billion offer for SolarCity has been controversial from the start, and shareholders confused about which way to vote got little help when proxy advisory firms Institutional Shareholder Services and Glass Lewis & Co. offered differing opinions on whether the deal should be approved.
The plan to combine an electric car manufacturer and a solar panel firm offers little in the way of near-term synergies, and given SolarCity's inability to turn a profit in recent quarters and its rising debtload there is considerable risk to Tesla's oversized ambitions should the merger close. Oppenheimer analysts have estimated the combined company could need to raise more than $12 billion by the end of 2018 to fund all of the announced plans of both Tesla and SolarCity.
Critics also complain that SolarCity used one-time maneuvers including adding years to the estimated useful life of their systems, thus reducing near-term depreciation expense, to make its recently-completed third quarter appear better than it was ahead of the vote.
Arguing against that criticism is a fundamental belief in Musk, the PayPal co-founder with a Tony Stark-like persona dabbling in everything from artificial intelligence to putting humans on Mars in addition to serving as CEO of Tesla and chairman of SolarCity. Musk sees the deal as the beginning of a vertically-integrated green energy powerhouse, a one-stop shop where an environmentally-conscious consumer will one day be able to buy panels to generate energy, battery systems to store it and gear including electric cars to use it.
Musk has called it "an accident of history" that the two companies were formed separately, arguing at the time the deal was announced that combined they would be able to pursue large corporate contracts that were "getting clunkier and clunkier" to do as joint ventures. The deal, in his mind, is a "no-brainer."
Tesla has a stronger brand than SolarCity and an extremely loyal customer base to sell to, and should be able to cut upwards of $150 million in duplicate costs. It also has a stronger balance sheet for SolarCity to borrow off of, and a network of retail locations to display roof panels in.
Shares of Tesla, priced at more than 50 times forward earnings projections and with a market cap more than double that of Fiat Chrysler Automobiles (FCAU) despite only registering a fraction of the global sales, have always traded more on Musk's long-term vision than on the current reality. And the betting is that Tesla's mostly institutional shareholder base will back the SolarCity deal based on their support of Musk's plan.
The spread on the deal - the gap between SolarCity's share price and the value of Tesla's offer - has come down considerably of late, implying that merger arbitrageurs are betting the deal goes through. Axiom Capital Management analyst Gordon L. Johnson II, a critic of SolarCity, in a note Wednesday upped his odds that the deal goes through from 50/50 to 70/30.
If one argument for approval is that investors believe in Musk, another is that they are afraid of appearing not to believe in him. Institutional Shareholder Services, the proxy firm that recommended in favor of the deal, in a report obtained by The Deal, a sister publication of TheStreet, cited among its reasons that "some investors raised the issue of the intangible risk posed by a vote of no confidence on a visionary leader."
Tesla's valuation is based in investor confidence that its vision for the future will eventually become a reality. Whatever the risk that comes with buying SolarCity, it seems unlikely that shareholders would rebuke the architect of that vision.