On the 21st June, Tesla was reportedly willing to acquire solar panel maker SolarCity for $2.8 billion USD in shares.
Tesla Core Mission?
Tesla, whose mission has always been tied to sustainability, is trying to combine renewable energy assets from SolarCity to its business to become the only vertically integrated energy company. Tesla is moving toward creating value through selling its products with a brand/quality premium and selling electrical components to the other automotive players. SolarCity’s acquisition will allow Tesla’s customers to buy carbon clean products from the battery to charge the car to the solar panel for housing energy requirements all in one place.
Market reactions & Point Of View
The news received opposing responses from the market: Tesla’s share dropped by 13% within one hour of trading, while SolarCity rose by 15% due to the bid premium, which was 25/35% over the market value. It was a strange reaction to news of a possible acquisition, with both parties expected to obtain substantial benefits in the form of cost reduction, revenue increase and production synergies (i.e. the Gigafactory in Nevada).
Why Received So Poorly?
Detractors think that SolarCity’s acquisition is just a bailout by Tesla. SolarCity has more than $6 billion in debt, and their shares dropped from 50$ to 20$ during 2016. Furthermore, there is a family relationship between Tesla and SolarCity’s board of directors. Another point is the different business of SolarCity, which may influence Tesla to shift from its core businesses, therefore increasing risk. In the end, accepting this deal will not so easy as affirmed by Morsy, a BNEF analyst;
“The company just raised $1.4 billion from an equity issuance in May to finance an accelerated production ramp of Model 3, and investors will have trouble looking past the $3.2 billion in debt that Tesla moves on to its balance sheet for a SolarCity enterprise value of just $5.8 billion.”
The winner: The Musk Family
If shareholders are in trouble and not convinced enough to disapprove this acquisition, the real winner will be Elon Musk and his family. The reason being: Tesla’s CEO, has a significant share in SolarCity, around 22.2% (compared to owning only 21% in Tesla). If the deal is confirmed, he will reap millions from his investment in SolarCity. Furthermore, his cousins comprise the BoD of SolarCity, Musk’s cousins Lyndon Rive and Peter Rive are respectively the CEO and CTO of SolarCity.
Recode.net stated Elon Musk would gain 700 million USD from the deal. Therefore, Elon and Antonio Gracias, directors in both companies, will not vote for the final decision due to their presence on both boards of directors. Only one problem remains for the Musk & Rive families: how much will the corporate governance change if the deal is successful? It is unlikely that Musk and River will remain at the same position in the post-acquisition Board.