Investor's Corner

Tesla-SolarCity merger gets the thumbs-up from shareholder advisory firm

Elon Musk unveils Tesla solar roof tiles [Source: Dennis Pascual]

Influential advisory firm, Institutional Shareholder Services (ISS), has given its clients the go-ahead to back the proposed Tesla-SolarCity merger. The announcement came as the SolarCity shareholders’ vote on November 17 approaches quickly. ISS offered three reasons why SolarCity will ultimately benefit shareholders.

  1. Buying SolarCity will help Tesla CEO Elon Musk transform Tesla into a green energy company with a product catalog that ranges from solar panels to electric cars. On October 28th, Tesla and SolarCity unveiled a solar roof product, which, along with Powerwall 2.0, demonstrated the kinds of products that the combined company will be able to create.
  2. The merger’s estimated $150 million cost savings could produce $1.5 billion in eventual gains when capitalized, thus, covering two-thirds of the purchase price.
  3. The price is right. Tesla’s offering of .11 of a newly issued share of SolarCity translated into a bid valued at $20.99 as of November 4, 2016, lower that the trade value of SolarCity when Musk unveiled his merger intentions several months earlier.

The proposed merger is a $2.3 billion deal.




Critics have voiced concerns that the Tesla/ SolarCity merger amounts to little more than a bailout of a family business, as Musk’s cousins, Lyndon and Peter Rive, head SolarCity. Moreover, SolarCity’s overall financial picture has weakened as the company assumed $3.1 billion in debt to support its investments. Additionally, independent solar companies face many challenges, including an inability to produce adequate energy efficiency.  Philip Shen with ROTH Capital Partners noted during a recent Q&A with Tesla and SolarCity executives that a number of companies have tried to pursue solar shingles in the past without success. Roth named Dow and Energy Conversion Devices as two companies who attempted to enter the solar shingle market but have “come and gone.”

The Tesla/ SolarCity merger is a necessary step in Tesla’s quest to become an integrated sustainable energy company. ISS affirmed that Tesla’s status as a $30 billion company without debt should have the wherewithal to reinforce gaps that should emerge within SolarCity’s financial architecture. These recommendations from ISS confer significant weight among the larger mutual funds, many of which make up Tesla’s independent shareholders.  Musk has stated that the merger of the two companies is a “no-brainer.”

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