Was the deal Tesla’s smartest move in 2016?
The world’s arguably most promising carmaker has recently acquired the US’s top solar distributor, in a rather controversial $2.6 billion deal in November 2016.
At first glance, you’d think the two companies merging will click instantaneously. Both Tesla and SolarCity have great ambitions for the future. The former is preoccupied with eight automobile models, and so far, two battery factories that are set to revolutionize battery-making in the US, as well as the rest of the world. The merger described by SolarCity’s chairman as a ‘’no brainer’’ is argued by analysts to come to SolarCity’s rescue solely, with no added value for Tesla, while to other analysts, it is a deal that will merit soon enough.
Although Tesla’s CEO, Elon Musk, thought the two companies were a match made in heaven, saying that it was a mere “accident of history” that Tesla and SolarCity ended up separate companies in the first place. The merger was not exactly easy to complete.
First of all, Musk owns 19 percent of Tesla and 22 percent of SolarCity and is its chairman. Secondly, the solar-power provider’s CEO, Lyndon Rive, is Musk’s cousin. Thirdly, Valor Equity Partners L.P. Founder, CEO, and CIO, Antonio Gracias, also serves as a director of both companies. The board was too overlapped that Musk and Gracias recused themselves from voting. Finally, the merger decision was left two board members with neutral backgrounds, Donald Kendall and Nancy Pfund.
How is SolarCity performing, anyway?
The parent company has shrunk SolarCity even before the November merger was finalized. Tesla signing a deal with the Japanese electronics industry company Panasonic as a partner in the Gigafactory 2, in Buffalo, New York, which ultimately suggests the cut down of the Silveo technology which was acquired back in 2014 by SolarCity.
As reported by GreenTechMedia last October, the Buffalo plant is expected to employ 1,460 workers and produce up to 10,000 panels per day. Panasonic would start making PV solar cells and modules in Buffalo in mid-2017.
According to SolarCity’s annual report, “As of December 31, 2016, the Company determined that the two remaining milestones will not be achieved by Silevo. As a result, the company changed the estimated probabilities and adjusted the accrued contingent consideration balance to $0, for the two remaining milestones.”
SolarCity had bought solar panel manufacturer Silveo for $200 million with $150 million in potential earn-out based on production and cost milestones.
In addition to SolarCity’s disappointing results in the fourth quarter of 2016, where solar installations made up just 201 MW down from 272 MW in 2015. While 2016’s installations were 803 MW down from 870 MW in 2015.
Was SolarCity’s acquisition a bad move?
SolarCity’s situation seemed dire from the get-go, investors such as Jim Chanos, and media and tech specialist, Matthew DeBord, couldn’t help but think the acquisition was a bailout. But Musk has already made himself clear on that, during Tesla’s SolarCity acquisition conference call back in June 2016.
It was all in Tesla’s rationale for the newly-acquired company; the priority being cash preservation over growth of megawatts deployed. ‘’Tesla isn’t deciding what the market value of SolarCity, the stock market is. SolarCity could certainly raise capital and equity on its current valuation without any problem. SolarCity is headed to a very healthy place from a cash flow standpoint in short order, certainly in the next three to five months getting to cash flow positive.
If the company on its own course to being cash flow positive and has the ability to raise equity capital on its own, I don’t see how an acquisition is in any way a bailout. That’s obviously a false description,’’ Musk said.
Goldman Sachs Group said that Tesla-SolarCity deal “Comes at a time when we believe should be singularly focused on becoming a mass automobile manufacturer.’’
Tesla’s dreams for the US top solar-energy distributor
The innovative carmaker, now energy company aims to reduce customer acquisition costs by cutting advertising spending, sell the products in Tesla’s stores instead, and shifting from leasing to selling solar energy systems. As well as launching the solar roof tiles.
The acquisition will create the first of its kind integrated sustainable energy company, handling everything from energy generation to storage, to transportation. Tesla’s is highly confident in the Powerwall 2’s ability to transform energy generation and storage drastically.
As for the financial benefits of the Tesla-SolarCity merger, Tesla believes the transaction is expected to add the company’s cash balance. Tesla said: ‘’We expect SolarCity to add more than half a billion dollars in cash to Tesla’s balance sheet over the next 3 years.’’ ‘’Continuing to transition to loans and cash transactions as opposed to leases will significantly improve SolarCity’s GAAP revenue and profitability,’’ the company added.
The Tesla-SolarCity deal might not have been the most popular, but it has got the immense potential that only time and dedicated work will unfold. Board members have to think how they’re going to elevate both companies and counter analysts claim that the merger is a drain on cash, a huge distraction to SolarCity’s business model change, and frankly, ‘’doesn’t make financial sense for Tesla,’’ at least not to Chuck Jones of Forbes.