Tesla, SolarCity Combine Under Single Company

The $2.6-billion deal combines electric vehicles, rooftop solar systems, energy storage batteries for homes and businesses, and software systems that tie everything together.

by Russ Mitchell, Los Angeles Times / August 1, 2016
On the morning of Aug. 1, SolarCity shares fell 6.2 percent to $25.06, while Tesla shares were down 0.7 percent at $233.21. Flickr/Mike Mozart

(TNS) -- Elon Musk’s Tesla Motors Inc. and SolarCity Corp. have agreed to combine, putting electric vehicles, rooftop solar systems, energy storage batteries for homes and businesses, and software systems that tie everything together, all under the banner of a single company.

It’s already a family affair: Musk, Tesla’s chief executive, owns about 21% of SolarCity and serves as chairman. His cousins Lyndon R. Rive and Peter J. Rive are SolarCity’s chief executive and chief technology officer, respectively.

The independent members of both companies’ boards approved the $2.6-billion all-stock deal, Tesla announced Monday. Under the deal, SolarCity stockholders would receive 0.11 of a Tesla share per SolarCity share.

SolarCity shares fell Monday morning, diving 6.2% to $25.06 around 9:15 a.m. Pacific Time. Tesla shares were down 0.7% at $233.21.

The marriage has great potential, but critics say it’s starting out with money troubles. Neither company is profitable and, more seriously, cash flow is being sustained more through drumming up investment capital and less through product sales.

“The real challenge here on all levels is producing a high volume level of product at a profit,” said Karl Brauer, senior analyst at Kelley Blue Book. “They’re going to have to do this in an increasingly competitive world.”

Unlike the market when Tesla’s Model S sedan launched, the automaker’s Model 3 will be going up against other automakers’ electric vehicles, even if the Palo Alto company delivers on its promise to deliver the first of the cars in late 2017. SolarCity, based in nearby San Mateo, has also struggled as solar panels have become cheaper. “The merger didn’t solve those challenges,” Brauer said.

Supporters say the strategic plan makes sense: Customers would be able to buy a single system to generate solar power from Tesla rooftop installations, store the energy in Tesla batteries and transfer the energy into their Tesla electric cars. It would also be possible to buy pieces separately.

Analysts said SolarCity could benefit from the strong Tesla brand, making Tesla showrooms a one-stop shop for energy storage and electric car sales and giving increased visibility to the solar firm. Tesla’s experience with power electronics could also translate into lower installation costs for SolarCity.

“The longer-term opportunity is to sell people a home energy management system,” said Jeff Osborne, managing director at Cowen and Co.

There are other, albeit more speculative, reasons for the union. Musk, who has bridled at the constraints involved in running a public company, will have one fewer to oversee. And if the cash issues grow more serious, he’d have one fewer company to save.

Raising money, however, could be easier.

“When you’re a lender, you obviously want more assets to lend against, said Michael Morosi, senior analyst at Avondale Partners. “Having that scale, having that umbrella, will most certainly make it easier for SolarCity to fund its operations.”

Although the price for SolarCity is “not lofty,” Morosi said — a result of the solar panel firm’s financial position — there is logic behind the deal as the market for both companies’ products looks to be more intertwined.

“To own a transportation company in isolation from an energy company maybe doesn’t make strategic sense anymore,” he said. “If 10 years from now, there are a million autonomous electric vehicles on the road, they’re going to have to charge someplace, and charging close to demand and close to company-owned or company-managed infrastructure is a way to derive more value.”

And, since both companies collect huge volumes of data from customer use of their products, that information could be combined into a rich database.

Tesla said that it expects the deal to close in the fourth quarter and result in cost synergies of $150 million in the first year after the deal closes.

However, the proposal must still be approved by a majority of the disinterested shareholders of Tesla and SolarCity and requires regulatory approval. It also contains a “go shop” provision that gives SolarCity 45 days to “solicit, discuss or negotiate alternative proposals from third parties.”

“If someone were to come in and make a higher offer, more than like a one penny higher offer, I guess the independent board members would be compelled to accept, and we’d have to find another path," Musk said Monday in a conference call.

Musk said he is committed to vote his shares according to what the independent directors recommend.

Musk also founded and runs the private rocket-launch company Space Exploration Technologies Corp., based in Hawthorne. He said Monday that he will "never" merge Tesla and SpaceX. "There is no product rationale for doing so," he said on Twitter.

In July, Musk presented an ambitious “master plan” for Tesla that includes new vehicles including a pickup truck, a heavy-duty truck and a new kind of bus. The company aims to turn out 500,000 cars in 2018, including the new “affordable” Model 3, for which the assembly line has not yet been built.

Musk recently said he expects its battery business will at least match the car business in revenue. It makes the Powerwall, which can be hung in a customer’s house, and the Powerpack, which stacks a bunch of Powerwalls in a cabinet, for business use.

Those products, as well as electric car batteries, will be produced at Tesla’s huge Gigafactory battery plant being built outside Reno at a cost of at least $5 billion.

©2016 the Los Angeles Time. Distributed by Tribune Content Agency, LLC.

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