Strategic, Financial Rationale Of Tesla-SolarCity Deal Unconvincing

Tesla Motors Inc TSLA announced it has offered to acquire SolarCity Corp SCTY in an all-stock deal valued at $26.50-$28.50 per share. RBC Capital Markets’ Joseph Spak commented that the proposed transaction is unlikely to be “well-received” by Tesla’s shareholders.

The deal represents a 21-30 premium over Tuesday’s closing price and values SolarCity at $2.6-$2.8bn. The market is likely to be skeptical of the strategic rationale and the strain on Tesla’s financials and cash flow.

“TSLA is billing themselves as a “sustainable energy” company, but we believe they need to do a better job convincing the market as to why this deal makes strategic (and financial) sense,” Spak said.

Related Link: JPMorgan On Tesla/SolarCity Deal: 'You Can't Put The Genie Back Into The Bottle'

More Questions Than Answers

Currently there is a great deal of uncertainty related to the transaction. Spak enumerated the points to consider as:

• While some customers may be interested in electric vehicles and storage products, there may not be meaningful cross-sell opportunities
• Unsure whether Tesla really needs to own the asset, since the companies already have relationships.
• SolarCity’s acquisition would not help Tesla’s cash burn. “Related, we need to better understand the financial constraints this puts on TSLA,” the analyst wrote.
• The sustainability of the SolarCity model could be challenged, especially if storage costs do not decline dramatically
• “Better explanation of the inter-company “dealings” and of Musk’s pledged SCTY shares (4mm) as collateral to his personal credit lines as investors could question governance,” Spak added.

The analyst has a Sector Perform for Tesla, with a price target of $242.