Elon Musk Aims to Shore Up SolarCity by Having Tesla Buy It

Source: By MICHAEL J. de la MERCED and PETER EAVIS, New York Times • Posted: Wednesday, June 22, 2016

Elon Musk is chairman of SolarCity and chief of Tesla Motors. Tesla has offered to buy SolarCity in an all-stock deal. Reuters 

Elon Musk has built an ambitious business empire on three pillars: electric carssolar energy and space travel.

Now, the billionaire entrepreneur is trying to shore up his embattled solar panel provider by merging it with the electric carmaker.

His Tesla Motors said on Tuesday that it had offered to buy SolarCity in an all-stock deal, one that could value the latter at as much as $2.8 billion. The aim, Mr. Musk argues, is to create a renewable-energy giant, collecting clean electricity and putting it to work propelling cars.

But the transaction highlights the unusual moves that Mr. Musk continues to make to support the various arms of his empire, where he is the largest shareholder of each company.

He has taken out loans to buy up shares in Tesla and SolarCity, some backed by his personal stock holdings in both companies — a risky move that leaves him exposed to margin calls if their stock prices slide too far. He has defended the practice as low-risk to other shareholders, given the sheer size of his personal net worth of more than $10 billion.

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In Mr. Musk’s view, putting Tesla and SolarCity together is only logical.

“We need to achieve a tight integration of the products,” he told reporters in a conference call on Tuesday. “I think it’s an obvious thing to do.”

An agreement is some time away, if one is ever reached. But shareholders in SolarCity pushed the company’s stock up 19 percent in after-hours trading, to $25.26. Shares of Tesla, however, tumbled more than 13 percent, to $190.59.

Both companies have been growing fast, but have also consumed enormous amounts of cash to pursue their goals.

Of the two, SolarCity — where Mr. Musk is chairman and his cousin, the co-founder Lyndon Rive, is chief executive — has been the more troubled, buffeted by changes in the regulations on the solar energy industry. While an important federal tax credit was extended, local policies have cut into the savings that solar providers have promised.

Mr. Musk said putting the two companies together made more sense after Tesla began introducing rechargeable batteries for home use that can store electricity and smooth out fluctuations in power grids. Other renewable energy companies have also focused on home storage products.

Analysts have commented that Tesla’s main business may be in batteries, particularly as it builds out its $5 billion “Gigafactory” near Reno, Nev.

“The world does not lack for automotive companies,” Mr. Musk said in Tuesday’s press call. “The world lacks for sustainable energy companies.”

Yet some green energy companies have run aground. Both SunEdison and Abengoa, big renewable energy providers, have filed for bankruptcy.

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SolarCity’s troubles have left the company with a crushing $2.6 billion in long-term debt and growing losses. Last year, interest payments on its debt equaled nearly a quarter of its sales.

Shares of the energy company have fallen 63 percent over the last 12 months, closing on Tuesday at $21.19 — nearly a third of its 52-week high. The business ended Tuesday with a market value of just over $2 billion.

Last year, SolarCity’s operations used up $790 million of cash, and the company spent $1.8 billion on equipment. In total, then, SolarCity’s free cash flow, obtained by adding those two numbers, was a negative $2.6 billion.

Tesla has had a better run of news over the last year, including promising presale numbers for the coming Model 3 sedan.

Still, Tesla shares, once a Wall Street darling, have fallen 16 percent over the last 12 months, valuing the company at $32.7 billion.

Tesla may be able to help SolarCity generate more cash or reduce its cash consumption. But bolstering the business model of SolarCity would be difficult.

And a struggling SolarCity could be a burden on Tesla, which is also using up cash fast. Tesla’s free cash flow last year was a negative $2.2 billion. In theory, then, a combination of Tesla and SolarCity would have burned nearly $5 billion last year.

Investors are willing to lend to, or buy the stock of, a high-growth company consuming a lot of cash if they believe it will eventually generate healthy cash flows.

But if investors balk, the company has to rely on its cash reserves. Together, Tesla and SolarCity had $1.8 billion on hand at the end of the first quarter. That would soon get used up if a Tesla-SolarCity were still consuming nearly $5 billion of cash annually.