Tags: Tesla | Solar City | Merger | Government Subsidies

Many Questions Ahead of the Tesla Solar City Merger

Many Questions Ahead of the Tesla Solar City Merger

Tesla' Elon Musk (Getty/Jerry Lampen)

By    |   Sunday, 13 November 2016 06:57 PM

The last few weeks have been busy for Elon Musk as SolarCity recently introduced shingle-like solar panels that would cover an entire roof and Tesla Motors reported a profitable third quarter. 

On the docket, there is the pending merger between these two companies, which could offer one stop shopping for clean energy solutions for homeowners, especially ones that own a Tesla. The thinking goes something like this — “SolarCity's home solar roofing, a Tesla's home battery to store the energy for nighttime use and the ability to recharge a Tesla electric car in the garage from sun power.”

Wall Street analysts love cost saving and product ceos-selling synergies, but they also tend to like details as well answers to arguably obvious questions. In this case there are a number of, including understanding how much it would cost to outfit a roof with SolarCity solar tiles, how much those solar tiles cost to manufacture? Fair questions since SolarCity has yet to market solar roofs. 

There is also the larger question as to how the merger of SolarCity and Tesla would lead to a combined and profitable company that can stand on its own two feet? While Tesla has stated it expects “SolarCity to add more than half a billion dollars in cash to Tesla’s balance sheet over the next 3 years” both Tesla and SolarCity are expected to lose money on their respective bottom lines over the coming quarters. Between those two companies, SolarCity is forecasted to continue to post steep losses in 2017 to the tune of -$8.57 per share while Tesla approaches breakeven status on its bottom line.

In thinking about it, it’s quite the head scratcher and more than likely has puzzled many an M&A strategist.

The merger of these two companies, which goes to a shareholder vote on November 17, and it’s fair to say the proposed merger has raised a number of eyebrows over the last few months. Some of this has been due to what many have seen as obvious conflicts — not only is Musk Chairman of SolarCity, and his first cousin is SolarCity’s CEO Lyndon Rive, but the Boards of the two companies have overlapping members. Musk also owns significant equity positions in both companies. 

There’s also the fact that all three Musk companies — Tesla Motors Inc., SolarCity Corp. and Space Exploration Technologies Corp. have benefited enormously from government support. According to data published by the Los Angeles Times, the trio of businesses has gobbled up $4.9 billion in “government incentives, including grants, tax breaks, factory construction, discounted loans and environmental credits that Tesla can sell. It also includes tax credits and rebates to buyers of solar panels and electric cars.”

Now there are three new wrinkles that have emerged ahead of this week’s vote. First, per The Wall Street Journal, “Congressional investigators are examining the use of tax incentives for solar-power companies, third-party financing and how the companies determine the value of the credits.”

SolarCity is one of the seven companies named in the initial investigation. Second, the outcome of the 2016 presidential election could see Presidential-elect Trump repeal federal incentives for solar energy. Third, proxy service company Glass Lewis & Co. recommended shareholder vote “no” for the proposed merger calling it a “thinly veiled bailout” for SolarCity.

Ultimately, shareholders for the two companies will decide whether or not the merger should occur. The proof in the merger pudding will take a few years to be realized.

Perhaps the combined company will do what most companies swimming in debt tend to do - restructure, cut costs and right size its business. If federal subsidies are slashed, Musk and crew may have no other option, but to do so and that would mean the $4.9 billion in government subsidies awarded to the Musk trio of companies would have been invested better elsewhere. Best case, the merger becomes a case study for students, worst case it dredges up the ghost of the Solyndra debacle. 

Christopher (Chris) Versace is the editor of the newsletter The Growth & Dividend Report and is a featured columnist to The Street.com as well as a contributor to FoxBusiness.com and Forbes.com.

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The last few weeks have been busy for Elon Musk as SolarCity recently introduced shingle-like solar panels that would cover an entire roof and Tesla Motors reported a profitable third quarter.
Tesla, Solar City, Merger, Government Subsidies
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2016-57-13
Sunday, 13 November 2016 06:57 PM
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