Tesla-SolarCity Would Create A 'Powerhouse,' But Shareholders Will Be Very Skeptical

SolarCity Corp SCTY has received an all-stock takeover offer from Tesla Motors Inc TSLA. Credit Suisse’s Patrick Jobin maintained an Outperform rating for SolarCity, with a price target of $38. The analyst commented that while shares may rally on the acquisition proposal, the deal is unlikely to receive Tesla shareholder approval.

The offer price represents a 21-30 percent premium to Tuesday’s closing price. SolarCity's board has not yet approved the offer and a shareholder vote would take place before finalizing a deal.

Deal Unlikely

Analyst Patrick Jobin expects Tesla’s shareholders to resist the deal. He cited the following reasons:

• Intense skepticism related to the residential solar space
• Regulatory risks
• SolarCity’s consumption of capital – The company mentioned it would need ~$2b this year
• Limited synergies

“We believe this announcement is enough to force SCTY shorts to cover, but given the corporate governance questions and likely shareholder opposition, we believe this will not be a simple acquisition,” Jobin wrote. He added that there didn’t seem to be a strong strategic or financial rationale for the proposed transaction, even though SolarCity is currently undervalued.

“While we expect a positive reaction for SCTY, we put a low 20-40% probability of the acquisition occurring and see heightened medium-term risks for SCTY should the pending acquisition disrupt the company's access to capital markets over the next 3-9 months,” the analyst stated.