In Tesla and SolarCity Deal, a Glimpse of Musk’s Clean-Energy Aspirations

Source: By LESLIE PICKER and BILL VLASIC, New York Times • Posted: Wednesday, August 3, 2016

Elon Musk is the chairman of SolarCity and chief executive of Tesla Motors. Rashid Abbasi/Reuters 

In the face of questions about debt, widening losses, governance and strategic logic, Tesla Motors and SolarCity announced a $2.6 billion stock merger on Monday.

Now, it is up to Elon Musk to persuade the shareholders of the two companies — he founded both — that the deal makes sense. The transaction requires the approval this year of a majority of shareholders from both Tesla and SolarCity, excluding Mr. Musk and other insiders.

Completion of the deal may come down to whether enough investors have the patience to accept the near-term headaches while waiting for Mr. Musk’s long-term vision.

His idea is that Tesla’s batteries could store the power that SolarCity’s panels have harnessed, a bet on the increasing use of solar energy. Most analysts, though, say this vision could take years, maybe even decades, to play out on a large scale — often longer than many investors tend to wait.

“I don’t know why people would be voting in favor of it,” said Efraim Levy, chief automotive analyst at Standard & Poor’s Global Market Intelligence. “The valuation is excessive given the current prospects and the time horizon we’re looking at.

But Mr. Musk, who also founded a third company with the hope of sending humans to Mars one day, is known for his visionary zeal. By doing this deal, he sees Tesla eventually moving beyond autos to become more of a clean-energy company that also happens to sell cars.

“This is really all part of solving the sustainable-energy problem,” Mr. Musk said in a conference call with analysts on Monday. “That’s why we’re all doing this — is to try to accelerate the advent of a sustainable-energy world.”

The stocks traded on Monday as if most investors expected the deal would get done. Under the terms of the deal, SolarCity shareholders will receive 0.11 Tesla shares for each SolarCity share they own. That represents $25.30 per SolarCity share, or about 58 cents under where the shares ended trading on Monday.

The prospects of a deal surfaced on June 20, when Tesla submitted a proposal to Lyndon Rive, the chief executive of SolarCity — and Mr. Musk’s cousin — to acquire the company. The letter included an exchange ratio of 0.122 to 0.131 shares of Tesla for each share of SolarCity, higher than the agreement reached on Monday.

Subsequently, independent members of the Tesla and SolarCity boards conducted due diligence and consulted with financial and legal advisers to arrive at the agreed-upon price.

Tesla, which will report its second-quarter earnings on Wednesday, is going through a major transition as a car company. It is expanding its assembly plant in California, in hopes of beginning to fill the more than 300,000 preorders for its coming Model 3 sedan by next year. To speed the process, Mr. Musk has overhauled his manufacturing team, bringing in new executives from rival automakers such as Audi.

Tesla is also facing more pressure from federal regulators and Congress about its Autopilot assisted-driving system, which was operational in a Model S that crashed into the side of a tractor-trailer in Florida on May 7. The driver, Joshua Brown, was killed in the accident — the first known fatality in a vehicle being driven by computer technology.

Tesla has until late August to respond to a set of detailed questions from the National Highway Traffic Safety Administration about the accident, as well any others involving the Autopilot system, which includes assisted steering, adaptive cruise control, collision avoidance and emergency braking.

The National Transportation Safety Board and the Senate Commerce Committee are also investigating the incident.

The safety investigations may not directly affect the approval process for the proposed merger. But they could be seen as setbacks in Tesla’s grand expansion strategy, and a distraction for Mr. Musk as he tries to win over investors.

SolarCity workers installing solar panels at a home in Camarillo, Calif., in 2014. J. Emilio Flores for The New York Times 

Monday’s deal includes a so-called go-shop period, which enables SolarCity to continue soliciting proposals from other parties until Sept. 14.

The two companies plan to cut about $150 million in costs through the transaction in the first full year after the deal closes. They expect customers to benefit through lower hardware and installation costs, and they plan to use Tesla’s 190 stores to expand SolarCity’s reach.

Through Tesla’s stores, SolarCity would get easier, cheaper access to millions of customers; SolarCity has struggled to reduce its customer acquisition costs. In addition, it could benefit from the carmaker’s expertise in manufacturing, just as SolarCity prepares to produce its own solar panels at a heavily subsidized factory in Buffalo.

Mr. Rive, of SolarCity, said in the conference call that he expected almost all solar systems to include battery storage within three to five years, and that the combined company would be able to prosper by providing those systems, along with energy services for the grid. Adding rooftop solar to the overall energy mix, Mr. Musk said, would allow utility companies to avoid building new substations and transmission lines as the rising use of electric vehicles and heating systems increases demand for power.

The merger, he said, would help Tesla take better advantage of all the customers it attracts to its stores by offering them more products. Making the solar systems appealing, he said, was important.

Although some investors have expressed support for the deal, many analysts and investors have continued to question whether it makes sense for the carmaker to take on SolarCity, which has piled on debt as it seeks to continue its aggressive expansion. Last month, SolarCity said it had raised $345 million in tax-equity financing and added $110 million to a loan agreement, bringing its total to $760 million.

And on Monday, SolarCity reduced projections for residential system installations for 2016 by nearly 10 percent because the pace of installations had been slower than expected in the first half of the year.

Many analysts are still optimistic that, despite the risks, the deal will ultimately get done.

“Everything about Elon is for the long term,” said David Whiston, an analyst with Morningstar. “I suspect the big, institutional shareholders understand that and they’re all in on Elon, and I expect the large shareholders will vote yes for the deal.”