The 150% Return That No One Wants

According to Bloomberg Gadfly's Liam Denning, the spread between SolarCity stock and Tesla's implied all-stock offer hit a new record last week of almost 25 percent. SolarCity's stock hit a 52-week low of $16.20 shortly after Friday's opening bell but managed to close the day at $17.50.

As part of the merger agreement announced in early August, SolarCity shareholders will receive 0.11 shares of Tesla for each share of SolarCity they own if the deal closes as scheduled. The deal at the time valued SolarCity's stock north of $25 per share.

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Denning noted that from a merger arbitrageur's perspective, the "gap between Tesla's offer and SolarCity's stock implies an enormous annualized return" of more than 150 percent.

However, investors most certainly aren't guaranteed this enormous return, as the return is subject to the merger closing as scheduled. Denning suggested that the massive spread indicates merger arbs aren't confident in the deal.

Denning added that even if the deal were to close, SolarCity's cash burn when combined with Tesla's own "sizable challenges" will end up damaging Tesla's stock, which is the currency they end up owning as part of the merger.

"In a normal situation, SolarCity's spread might be 50 to 75 cents per share, offering an annualized return around 15 to 20 percent," Denning concluded. "At the actual spread, it looks like this deal is headed for the buffers, as Tesla shareholders balk at taking on the extra risk or, at least, demand another cut to the exchange ratio. I guess you guys know what you're doing."

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