Conflicting Views Exist About the Tesla-SolarCity Acquisition
- By James Li
Tesla Motors Inc. (TSLA) announced an all-stock merger with SolarCity Corp. (SCTY) for $2.8 billion o n June 21 .
This deal provoked conflicting views among the CEO, analysts and investors. Although the acquisition appears to benefit the two companies in terms of synergies, the deal has an overall negative financial impact.
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The intrinsic value of TSLA
A synergetic deal
Incorporated in 2003, Tesla designs and manufactures electric vehicles and energy storage products. In its recent 10-Q, the electric vehicle (EV) company's board of directors introduced some of its recent products: the Model 3, a low-cost version of their Model S sedan, and two next generation storage packs, the 7 kWh Powerwall and the 100 kWh Powerpack. Currently sold under the Tesla Energy brand, the two energy storage products benefit customers with "renewable energy storage," facilitating the process of recharging electricity-based products.
To address the problem of "sustainable energy production," as mentioned in the June 22 conference call, the Tesla team announced its acquisition of SolarCity. With this acquisition, the board of directors can improve customer needs by using solar energy to recharge its power packs, creating one of the most important potential synergies. According to the Tesla team's blog post, the SolarCity acquisition provides the following synergies: vertical integration of end-to-end clean energy products, addressable market expansion, efficient use of core competencies, the best possible installation services and an overall cultural fit for the two companies.
Analysts question the deal
While the SolarCity acquisition gives Tesla natural synergies, many analysts question the feasibility of the deal. Brian Johnson from Barclays Capital, for example, suspects the integration of the two companies' operations. Since only 1% of U.S. households have access to solar energy, Johnson and other analysts doubt that the majority of Tesla's shareholders will be interested in solar-powered energy packs. Additionally, Sachin Shah from Albert Fried and Company believes that more investors will vote against the merger.
In addition to questioning the deal's feasibility, other analysts believe that this deal can negatively affect Tesla's company value. Instead of benefiting the EV company, the potential synergies appear to benefit SolarCity instead, as implied by Colin Rusch of Oppenheimer and Co. In his conference call questions, Rusch contemplates how the synergies of the deal will benefit Tesla other than increased sales in solar-powered energy packs. Additionally, the Oppenheimer analyst disbelieves that the acquisition would reduce installation costs. As Rusch believes the deal has negative implications for Tesla, he downgraded his recommendation for Tesla's stock from buy to hold Tuesday afternoon.
Three other analysts, one each from Goldman Sachs, UBS and Credit Suisse, raised questions about the deal's financial stability during Wednesday's conference call. The Goldman Sachs analyst addressed energy costs, while Colin Langan from UBS discussed SolarCity's liquidity concerns and potential increases in cash burn. Additionally, Langan believed that the deal is an "unneeded distraction," as mentioned in a ValueWalk article discussing this acquisition. Credit Suisse analyst Patrick Jobin also focused on capital and cash flows: in addition to addressing about the legal impediments to the deal, Jobin also investigated how Tesla will provide capital to SolarCity before the deal takes place.
CEO and investor pleads their case
Tesla CEO Elon Musk addresses each of the analysts concerns with remarks about why the SolarCity acquisition is a "no-brainer." Although 99% of households currently have little or no access to solar power, Musk stresses that households generally will implement cost-saving measures whenever possible. Since solar energy is abundant and usually cheaper than fuel and gas, the EV company CEO believes that the SolarCity acquisition would make energy costs cheaper than before.
In addition to lowering energy costs, the SolarCity acquisition would make Tesla the world's best manufacturer, according to the CEO. Furthermore, the CEO stresses that as the world's best manufacturer of electricity vehicles and solar-powered energy packs, Tesla would decrease its cash burn and begin making positive operating margins by 2017. Furthermore, guru Ron Baron (Trades, Portfolio), who currently owns over 1.4 million shares of Tesla, expects Tesla's Model 3 to be one of the largest product launches in history, with sales close to "24 million people around the world ordering an iPhone" never unveiled.
Conclusions
While the CEO believes the synergies will outweigh the overall costs, most analysts still doubt that the SolarCity acquisition will actually go through. Two GuruFocus articles suggest that the deal could further weaken both companies' financial strength and profitability, especially if the acquisition fails. Tesla is currently one of the biggest sell targets, according to James Montier (article, screener). Additionally, SolarCity could potentially be a "ticking time-bomb," since its financial strength metrics are very weak.
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This article first appeared on GuruFocus.
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The intrinsic value of TSLA
