Analysts and investors have reacted coolly to Elon Musk’s initiative, announced last week, to merge his Tesla Motors with SolarCity—a company founded by two of his cousins and of which Musk is chairman.
Tesla plans to acquire SolarCity, the largest rooftop solar installer in the United States, for about US$2.8 billion in its own shares, creating what Musk describes as “the world’s only vertically integrated energy company.” However, Tesla shares plunged by about 10% in the 24 hours following the announcement, trimming $3 billion from its market capitalization.
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“Some think the deal looks suspiciously like a bailout for SolarCity, which has been losing money and failing to hit targets,” The Economist reports. “Mr. Musk has [previously] taken out around US$500 million in personal credit lines, and bought shares in Tesla and SolarCity when they needed capital.”
Musk maintains that, “to solve the sustainable energy question we need sustainable energy production, which is going to come overwhelmingly in the form of solar in my view. Combine that with stationary storage and electric vehicles, and you have a complete solution to a sustainable energy future. And those are three things that I think Tesla should be providing.”
To make that happen, however, SolarCity will have to continue to expand—something that Musk may not be able to count on. According to data collected by Greentech Media, national installers, including SolarCity, are witnessing slower expansion as regional competitors make gains.
“Financial analysts,” Greentech notes, “see SolarCity’s recent weak performance as a major drag for Tesla. Barclays called the deal a ‘lean, mean cash-burning machine for Tesla’ and a ‘lifeline for SolarCity.’ J.P. Morgan sees few synergies between the two. Credit Suisse estimated a low—20% to 40%—probability the deal will be approved” at all.
“The benefits seem to be brand recognition rather than complementary products in the near term,” said M.J. Shiao, director of solar research at GTM Research. “For now, EVs and solar are different products, and the sales pitches don’t match. Is the average person going to walk into the store expecting to buy one and then suddenly get upsold on the other?”
The New York Times points to yet another problem: competition. Tesla “is not the only company with such a grand vision. Utility stalwarts like Edison International and Con Edison are developing energy services and consulting divisions, while technology giants like General Electric, Oracle, Google, and even Apple are getting into the business of providing or managing power.”
“I’m struggling on this one,” one investment analyst, who described himself as “generally a fan of Tesla,” told Greentech. “Given the challenge both companies face from a cash burn standpoint, they are not advantaged by a merger in any way I understand. That said, you can never count Elon Musk out.”