SolarCity Represents A 'Lean, Mean, Cash-Burning Machine' For Tesla

Tesla Motors Inc TSLA has offered to acquire SolarCity Corp SCTY in an all-stock deal valued up to $2.9bn. Barclays’ Brian A. Johnson commented in a report that the deal involves the assumption of an additional $2.6bn of debt in a transaction that offers limited synergies and uncertain growth/cash prospects, which “only reinforces our negative view” of Tesla.

Analyst Brian Johnson has Underweight ratings for both Tesla and SolarCity, with price targets of $165 and $20), respectively.

Merger Reinforces Cash Burn

SolarCity has limited access to capital, and the deal would allow the company to benefit from Tesla’s “relatively favorable access to and cost of capital,” Johnson said. He added, however, that the combined entity is likely to “magnify the losses and cash burn” that both the companies are witnessing individually.

The cash burn estimate for the combined entity is $2.8bn for 2016 and $2.4bn for 2018, as well as the $2.5bn of combined net debt.

“In funding SCTY’s losses, it further reinforces our view TSLA will need to return to the capital markets for additional capital infusions, likely via the equity markets. However, this is contingent on the equity capital market remaining an open well for TSLA – which is far from certain,” the analyst wrote.