Musknado - Tesla Tumbles After Offering To Acquire SolarCity

Desperate, or Distracted? Elon Musk's Tesla has offered to acquire Elon Musk's cousin's SolarCity for 0.122 to 0.133 Tesla shares. Tesla shares are tumbling on the news, as perhaps they read the five reasons why SolarCity pain is only just beginning? As Herb Greenberg asked, "is this even legal?"

From Tesla's blog,

Tesla’s mission has always been tied to sustainability. We seek to accelerate the world’s transition to sustainable transportation by offering increasingly affordable electric vehicles. And in March 2015, we launched Tesla Energy, which through the Powerwall and Powerpack allow homeowners, business owners and utilities to benefit from renewable energy storage.

It’s now time to complete the picture. Tesla customers can drive clean cars and they can use our battery packs to help consume energy more efficiently, but they still need access to the most sustainable energy source that’s available: the sun.

The SolarCity team has built its company into the clear solar industry leader in the residential, commercial and industrial markets, with significant scale and growing customer penetration. They have made it easy for customers to switch to clean energy while still providing the best customer experience. We’ve seen this all firsthand through our partnership with SolarCity on a variety of use cases, including those where SolarCity uses Tesla battery packs as part of its solar projects.

So, we’re excited to announce that Tesla today has made an offer to acquire SolarCity. A copy of Tesla’s offer is provided below.

If completed, we believe that a combination of Tesla and SolarCity would provide significant benefits to our shareholders, customers and employees:

  • We would be the world’s only vertically integrated energy company offering end-to-end clean energy products to our customers. This would start with the car that you drive and the energy that you use to charge it, and would extend to how everything else in your home or business is powered. With your Model S, Model X, or Model 3, your solar panel system, and your Powerwall all in place, you would be able to deploy and consume energy in the most efficient and sustainable way possible, lowering your costs and minimizing your dependence on fossil fuels and the grid.
  • We would be able to expand our addressable market further than either company could do separately. Because of the shared ideals of the companies and our customers, those who are interested in buying Tesla vehicles or Powerwalls are naturally interested in going solar, and the reverse is true as well. When brought together by the high foot traffic that is drawn to Tesla’s stores, everyone should benefit.
  • We would be able to maximize and build on the core competencies of each company. Tesla’s experience in design, engineering, and manufacturing should help continue to advance solar panel technology, including by making solar panels add to the look of your home. Similarly, SolarCity’s wide network of sales and distribution channels and expertise in offering customer-friendly financing products would significantly benefit Tesla and its customers.
  • We would be able to provide the best possible installation service for all of our clean energy products. SolarCity is the best at installing solar panel systems, and that expertise translates seamlessly to the installation of Powerwalls and charging systems for Tesla vehicles.
  • Culturally, this is a great fit. Both companies are driven by a mission of sustainability, innovation, and overcoming any challenges that stand in the way of progress.

Today’s offer to acquire SolarCity is only the first step toward a successful combination of Tesla and SolarCity. We will provide a further update if and when an agreement is reached.

*  *  *

Some details...

  • *TESLA SAYS INTENTION TO PROCEED ONLY ON A FRIENDLY BASIS
  • *TESLA PROPOSAL EXCHANGE RATIO 0.122X-0.131X SHRS OF TESLA STK
  • *TESLA OFFERS TO BUY SOLARCITY; DEAL VALUED AT $26.50-$28.50/SHR

Which puts the offer around a 26% premium (before the collapse in TSLA afterhours)..

 

But TSLA is tumbling after hours... to 3 month lows...

 

And of course - verge of bankruptcy SCTY is jumping...

 

Funnily enough - TSLA has lost more than the market cap of SCTY in after-hours trading.

As @WallStCynic noted, SCTY was going bankrupt this year, with a $700 million cash burn/qtr. TSLA now assumes that cash outflow. Wow. This is a desperate move.

And a perfectly timed report from Goldman coming out after today's close, warns of covenant risks at SCTY

Almost all companies in our solar coverage carry some amount of debt that subjects them to financial covenants. Our analysis suggests that GLBL may breach covenants in mid-2016, potentially losing access to the undrawn revolver, while investor feedback suggests that SCTY's covenants are a particular point of focus in the very near term. However, we think the company will be able to remain compliant in 2Q16 by a small margin, with headroom improving beyond this point. In this report, we update estimates for SCTY and CAFD.

 

Solar is financing-intensive and the balance sheet matters

 

The global solar industry has raised c.$200bn of cumulative debt financing since 2010, while at the same time operating cash flow within our coverage has declined by $3bn. Not surprisingly, indebtedness has increased and aggregate interest coverage is now negative vs. 2X in 2011. Through 2017 we expect leverage to expand further to fund growth, as we model the majority of coverage to increase gross debt by 50%+ vs. current levels.

The full breakdown of SolarCity's covenants, which as Goldman hints would have been dangerously close to getting breached absent some dramatic rescue:

Goldman adds:

SolarCity’s revolver, which matures in 2017, has several financial covenants, including (1) a minimum interest coverage ratio of 1.5x and (2) minimum liquidity of $50mn. While we do not expect SolarCity to trip either of these covenants, we believe the interest coverage could approach the minimum covenant in F2Q16 – and be a point of emphasis for investors ahead of the earnings call in July/August – before exceeding the required minimum ratio by a comfortable margin in future quarters. We note that SolarCity also has a term loan that includes financial covenants (e.g., interest coverage), but the loan is considered nonrecourse and project-level disclosures have not been made public; thus we do not include this debt in our analysis.

Updating estimates: We refresh our quarterly estimates for SolarCity, although our annual estimates and $23, 12-month, DCF-based price target are unchanged. Our changes relate to individual pieces of debt cost, which we’ve made to more accurately reflect the current cost of borrowing. Key risks include volume growth, net metering, competition, and interest rates.

So looks like Musk is bailing himself out his SCTY equity (where he is the largest shareholder) with richly priced TSLA stock (of which he is also the largest shareholder).

We look forward to the legal shenanigans here - there must be a ton of related party transactional issues, with Musk effectively tied into both companies beyond extrication since the CEO of SolarCity is Elon Musk's cousin. Shenanigans such as this one, revealed in SCTY's recent 10Q, in which Musk, via SpaceX, was purchasing SolarCity junk bonds:

In March 2015, Space Exploration Technologies Corporation, or SpaceX, purchased $90.0 million in aggregate principal amount of 2.00% Solar Bonds due in March 2016. In June 2015, SpaceX purchased an additional $75.0 million in aggregate principal amount of 2.00% Solar Bonds due in June 2016. In March 2016, $90.0 million in aggregate principal amount of the Solar Bonds held by SpaceX matured, and the proceeds were reinvested by SpaceX in $90.0 million in aggregate principal amount of 4.40% Solar Bonds due in March 2017. SpaceX is considered a related party, the Company has also issued Solar Bonds to other related parties and such Solar Bonds are separately presented on the consolidated balance sheets (see Note 11, Related Party Transactions).

Finally, we wonder if 22nd Century investors will be warned of "Musk Schemes"?

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