This past June, Tesla announced its intention to acquire SolarCity in an all-stock deal, at a premium of approximately 21-30% over the closing share price. On August 1, the two companies formally announced a $2.6 billion stock merger. On Thursday, the Federal Trade Commission approved the deal, citing no antitrust concerns. Is anything standing in the way of Elon Musk’s latest vision becoming reality?
His largest and final hurdle comes in the form of his investors: will Mr. Musk be able to convince his investors that his long-term vision for the combined company outweighs the market’s pessimistic outlook on SolarCity’s near-term returns? Are solar powered electric vehicles a moonshot (for now) or the next reality? Can Tesla transform from a car manufacturer to a renewable energy company that sells cars?
On a theoretical level, the combination of Tesla and SolarCity can make sense. The two companies have an overlapping customer pool and can make use of Tesla’s 190 existing stores, which will ultimately expand reach and drive down customer acquisition costs on both ends for the various products. Out of the entire renewables family, solar technology has experienced the largest economies of scale and cost reduction compared to traditional power generation. And battery-based systems continue to increase as a focus for solar as lithium-ion batteries become cheaper and cheaper. Tesla customers will be able to help power their homes and cars with rooftop solar – forging a path into a sustainable energy world.
However, residential solar has not been without its own share of problems and complexities. The three market leaders in residential solar (SolarCity, Vivint, and Sunrun) are currently valued at approximately $3.3 billion – less than half of what they were worth a year ago. Slower pace of new installations, regulatory hurdles (e.g. SolarCity pulling out of Nevada after the Public Utility Commission decided to end net metering), lack of positive free cash flow generation, and aggressive tax-equity and debt financing strategies have made these companies much riskier for investors. Let’s not even get started on residential solar’s entry into the consumer loan market to help customers finance their systems.
Because SolarCity has been performing so poorly over the past year, it is hard to see this acquisition as anything other than a bailout. However, the potential for synergies is undeniable and Mr. Musk’s visionary strategies have passed test after test. I believe the shareholder vote will come down to one question: do you trust in Musk or not?