Oppenheimer Downgrades Tesla: SolarCity Deal Not The Best Use Of Company's Capital, Human Resources

Tesla Motors Inc TSLA has made a formal offer to acquire SolarCity Corp SCTY in an all-stock deal. Oppenheimer’s Colin Rusch downgraded the rating on Tesla Motors to Perform.

“We believe investors are likely to view this transaction as a bailout for SCTY and a distraction to TSLA's own production hurdles,” Rusch mentioned.

With the proposed acquisition of SolarCity, the analyst believes Tesla is contemplating a fundamental change to its business model.

Related Link: Tesla's Bid Suggests 'Very Little Value' In SolarCity; Gordon Johnson Maintains Sell

“While we remain bulls on the solar industry, we do not view this acquisition as the best and highest use of TSLA’s capital and human resources given the potential return on capital possible in the electricity industry versus the potential leverage of the TSLA auto platform,” Rusch pointed out.

The analyst expects the uncertainty related to the acquisition and the subsequent corporate structure to pressure the stock.

The Impact Of The Deal

According to the Oppenheimer report, “The combined entity is expected to operate under the Tesla brand offering vehicles, battery packs, and rooftop solar.”

Tesla expects significant COGS and sales and marketing synergies from the acquisition due to the product component overlap. The company also believes the integrated product offering would improve sales/sq ft of its retail stores.

“We believe this acquisition would alleviate some of the financial concerns at SCTY and yield operational synergies for the SCTY platform including improved brand position, additional customer outreach, and improved engineering talent, but we struggle to see the benefit to TSLA other than potential leverage on its retail stores,” Rusch added.