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

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

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

Related Link: Musk Be Nice? SolarCity Spikes 20% Amid Acquisition Offer From Tesla

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 $2.8 billion for 2016 and $2.4 billion for 2018, as well as the $2.5 billion 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.

Latest Ratings for TSLA

DateFirmActionFromTo
Jul 2017CitigroupInitiates Coverage OnNeutral
May 2017Independent ResearchInitiates Coverage OnHold
May 2017Morgan StanleyDowngradesOverweightEqual-Weight

View More Analyst Ratings for TSLA
View the Latest Analyst Ratings

Posted-In: Barclays Brian A. JohnsonAnalyst Color Short Ideas Reiteration Analyst Ratings Trading Ideas

 

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