What If Tesla Motors Inc And SolarCity Corp Deal Fails?

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While most analysts seem to agree that it would not be beneficial for Tesla Motors Inc (NASDAQ:TSLA) to buy SolarCity Corp (NASDAQ:SCTY), Morgan Stanley highlights that it might be worse for the automaker if the deal doesn’t pass. The firm’s report comes following another report in which it downgraded the automaker, a huge move because it has been bullish for some time. Meanwhile, this morning Tesla has received another downgrade, this time from Argus.

More board members recused from vote

Tesla and SolarCity are going to extreme lengths to get this deal through. Tesla appears to already see it as a done deal because it has registered some trademarks to sell solar products under its brand name. Tesla CEO Elon Musk, who is also SolarCity’s chairman and the biggest shareholder of both companies, has recused himself from voting on the offer. This week two more board recused themselves: Musk’s cousin Peter Rive and Tesla Chief Technology Officer and co-founder JB Straubel.

SolarCity CEO Lyndon Rive, also a cousin of Musk, and Antonio Gracias, who serves on both companies’ boards, have also recused themselves from voting on the offer. That leaves only three SolarCity board members to vote on the proposal.

What if Tesla’s bid for SolarCity is rejected?

Some analysts have noted that things will get much harder for SolarCity if the deal doesn’t go through. Although the bid is widely seen as being bad for Tesla, it could be even worse if it doesn’t go through, suggests Morgan Stanley analyst Adam Jonas. For one thing, he notes that if shareholders reject the deal, it could be seen as a change in their support of Musk. It could also impact Tesla’s ability to secure capital by causing its WACC to “rise materially whether or not the SCTY deal is approved.”

Argus analysts said today that they have downgraded Tesla to Hold due to the “ill-timed acquisition bid for SolarCity.” They also removed it from their focus list. They believe the bid comes “at an inappropriate time in the life of Tesla Motors, as the company still struggles to become a profitable firm.” It’s likely that the acquisition will mean that it takes longer for the automaker to become profitable. Further, they note that the all-stock offer for SolarCity will likely dilute shareholders’ stakes significantly, and they see an “elevated risk level” in the event of a merger of the two firms.

Shares of Tesla rose by as much as 1.43% to $201.40, while SolarCity stock surged as much as 4.15% to $23.56 in early trading on Tuesday.

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