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Why the SolarCity Offer is a Bad Deal For Tesla Shareholders
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Yesterday, Tesla (TSLA - Free Report) offered to purchase SolarCity for between $26.50-$28.50 per share in an all-stock purchase. The bid represents a 21% to 30% premium over SolarCity’s closing price on the 20th of June.
SolarCity shares have surged nicely, and this is normal for any stock being bought out at a premium. Tesla shares didn’t respond very well after the SCTY offer was announced though, and TSLA has lost over 7% in share value since the news release. This represents over $2 billion in market cap which was lost for Tesla.
Obviously, shareholders of the electric car company didn’t feel very optimistic about the purchase, and this makes sense. If you are wondering why the deal isn’t great for TSLA though, check out these three reasons for why the offer is leaving a bad taste in the mouths of TSLA shareholders.
Is Tesla a Car Company, or Musk’s Vision?
Most Tesla shareholders are invested in the car and electric vehicle powertrain components producer because they believe its business model and products have a lot of growth potential. By eliminating the need for dealerships, Tesla is in a unique position compared to other peers in the auto industry. Tesla’s model also gave shareholders a chance to invest in a purely electric play. However, this offer to buy SolarCity now conflicts with that stance.
It seems as though shareholders are being forced to give up their ideas of what they thought they were buying. Tesla’s letter says that when these two companies are brought together, they will be “the world’s only vertically integrated energy company”. Most folks don’t immediately think of “energy company” when they think of Tesla. When People hear “Tesla”, they think about style, elegance, and power coming from a premium line of electric vehicles. It seems rather odd that the company’s identity is looking to make a significant shift towards being a clean energy company. The move could prove to be valuable in the long run, as oil and coal reserves are sure to run out one day. This isn’t what shareholder’s signed up for though.
What is Tesla Paying for in Terms of Financials?
SolarCity has struggled with becoming profitable, and a lot of this can be attributed to the fact that net income has been negative in each of the last four fiscal years. Pretax income has been growing deeper into negative territory over the last three years. In fact, from 2013 to 2015, pretax income has gone from -$177 million to -$710 million.
This lack of profitability has really hurt the company’s cash flows. Over the last two years, the company has used billions of dollars towards investing activities. Operating cash flows have not helped to offset the aggressive investing activity because they’ve been negative for both of the last two years. What’s worse is the fact that operational cash flows have gone from -$217.85 million in 2014 to -$789.88 million in 2015.
The business doesn’t seem sustainable based on these metrics, and it has been issuing shares and debt to support itself financially. This has resulted in a very leveraged balance sheet, which now has liabilities topping over $6.5 billion. This is more than double the price that Tesla is willing to pay for SCTY. When you buy a company, you buy its liabilities as well, so many TSLA shareholders can’t help but feel ripped off.
Is There a Conflict of Interest Between Musk and Tesla Shareholders?
Elon Musk is the CEO and largest shareholder of Tesla. He is also the chairman and largest shareholder in SolarCity. His cousin is also a co-founder and CEO of SolarCity. Personally, I can’t help but think that he has pressured Tesla’s board to act in saving his struggling solar company. This is because it looks as though SolarCity is a far cry from being sustainable. Under Tesla’s flag, it stands to save costs and improve its profitability. It may even be able to fly under the radar more effectively by avoiding the scrutiny that comes with being analyzed under its own stock ticker.
That benefit only seems to go one way though. Tesla doesn’t really look like it will save much in costs from an acquisition over the short to medium term. In fact, many argue that TSLA’s financial burdens will only increase from purchasing SCTY. A big reason for why I think there is a conflict between what TSLA shareholders want and what Elon wants is because there is a history of Musk’s companies intertwining financially. Last year, for example, SpaceX (one of Musk’s companies) bought $165 million in bonds from SolarCity.
Bottom Line
There definitely seems to be some clashing between Musk’s vision and what Tesla shareholders expect to receive from their investment. Investors question whether this clash goes against what they ultimately want; a stake in a premier electric car company. Elon Musk is a genius and an innovator, but there are so many aspects of this offer which seem to primarily benefit SolarCity shareholders and few others.
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Why the SolarCity Offer is a Bad Deal For Tesla Shareholders
Yesterday, Tesla (TSLA - Free Report) offered to purchase SolarCity for between $26.50-$28.50 per share in an all-stock purchase. The bid represents a 21% to 30% premium over SolarCity’s closing price on the 20th of June.
SolarCity shares have surged nicely, and this is normal for any stock being bought out at a premium. Tesla shares didn’t respond very well after the SCTY offer was announced though, and TSLA has lost over 7% in share value since the news release. This represents over $2 billion in market cap which was lost for Tesla.
Obviously, shareholders of the electric car company didn’t feel very optimistic about the purchase, and this makes sense. If you are wondering why the deal isn’t great for TSLA though, check out these three reasons for why the offer is leaving a bad taste in the mouths of TSLA shareholders.
Is Tesla a Car Company, or Musk’s Vision?
Most Tesla shareholders are invested in the car and electric vehicle powertrain components producer because they believe its business model and products have a lot of growth potential. By eliminating the need for dealerships, Tesla is in a unique position compared to other peers in the auto industry. Tesla’s model also gave shareholders a chance to invest in a purely electric play. However, this offer to buy SolarCity now conflicts with that stance.
It seems as though shareholders are being forced to give up their ideas of what they thought they were buying. Tesla’s letter says that when these two companies are brought together, they will be “the world’s only vertically integrated energy company”. Most folks don’t immediately think of “energy company” when they think of Tesla. When People hear “Tesla”, they think about style, elegance, and power coming from a premium line of electric vehicles. It seems rather odd that the company’s identity is looking to make a significant shift towards being a clean energy company. The move could prove to be valuable in the long run, as oil and coal reserves are sure to run out one day. This isn’t what shareholder’s signed up for though.
What is Tesla Paying for in Terms of Financials?
SolarCity has struggled with becoming profitable, and a lot of this can be attributed to the fact that net income has been negative in each of the last four fiscal years. Pretax income has been growing deeper into negative territory over the last three years. In fact, from 2013 to 2015, pretax income has gone from -$177 million to -$710 million.
This lack of profitability has really hurt the company’s cash flows. Over the last two years, the company has used billions of dollars towards investing activities. Operating cash flows have not helped to offset the aggressive investing activity because they’ve been negative for both of the last two years. What’s worse is the fact that operational cash flows have gone from -$217.85 million in 2014 to -$789.88 million in 2015.
The business doesn’t seem sustainable based on these metrics, and it has been issuing shares and debt to support itself financially. This has resulted in a very leveraged balance sheet, which now has liabilities topping over $6.5 billion. This is more than double the price that Tesla is willing to pay for SCTY. When you buy a company, you buy its liabilities as well, so many TSLA shareholders can’t help but feel ripped off.
Is There a Conflict of Interest Between Musk and Tesla Shareholders?
Elon Musk is the CEO and largest shareholder of Tesla. He is also the chairman and largest shareholder in SolarCity. His cousin is also a co-founder and CEO of SolarCity. Personally, I can’t help but think that he has pressured Tesla’s board to act in saving his struggling solar company. This is because it looks as though SolarCity is a far cry from being sustainable. Under Tesla’s flag, it stands to save costs and improve its profitability. It may even be able to fly under the radar more effectively by avoiding the scrutiny that comes with being analyzed under its own stock ticker.
That benefit only seems to go one way though. Tesla doesn’t really look like it will save much in costs from an acquisition over the short to medium term. In fact, many argue that TSLA’s financial burdens will only increase from purchasing SCTY. A big reason for why I think there is a conflict between what TSLA shareholders want and what Elon wants is because there is a history of Musk’s companies intertwining financially. Last year, for example, SpaceX (one of Musk’s companies) bought $165 million in bonds from SolarCity.
Bottom Line
There definitely seems to be some clashing between Musk’s vision and what Tesla shareholders expect to receive from their investment. Investors question whether this clash goes against what they ultimately want; a stake in a premier electric car company. Elon Musk is a genius and an innovator, but there are so many aspects of this offer which seem to primarily benefit SolarCity shareholders and few others.
The Zacks Rank is a truly marvelous trading tool. Our ranking system has beaten the S&P 500, yielding an average return of 25% per year for the last 29 years! Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>