Tesla Motors shocked Wall Street and raised more than a few eyebrows Tuesday night when it announced that it had entered a buyout offer for SolarCity. Analysts from several firms downgraded at least one of the two companies, and investors appear to see it as a huge misstep for Tesla. Tesla shares plunged, while SolarCity stock surged, although its shares started to retreat off their high during regular trading hours on Wednesday.
Even Morgan Stanley is skeptical of the deal
Even Morgan Stanley analyst Adam Jonas, who is extremely bullish on Tesla Motors Inc (NASDAQ:TSLA) with a huge $333 price target, is skeptical of the deal. Tesla intends to pay up to $2.9 billion all in shares in a deal Tesla CEO and SolarCity Corp (NASDAQ:SCTY) Chairman Elon Musk calls “the obvious thing to do.” The executive also sees a “huge opportunity” to create an integrated energy company by uniting the two firms and that the deal aligns with Tesla’s vision of sustainable energy for all.
Jonas, however, said the transaction makes execution at Tesla even more complex than it already has at a time that’s extremely sensitive for its core business. However, Musk assured investors and analysts on a conference call this morning that the transaction won’t affect the gigafactory, put strain on Tesla, or delay the release of the Model 3. Jonas questions what benefit Tesla investors would get from a combination.
He also notes that while tesla has proven it can make “great cars,” it has yet to prove that it can do this while also generating profits or positive cash flow. He admits that Tesla is in a very capital-intensive business, but the automaker has been making hefty investments in areas like the gigafactory, Supercharger network, and development of the Model 3.
These investments are coming in areas where traditional automakers aren’t investing, and many of them will require continual funding for many years. Jonas suggests that Tesla might even be cash flow positive at the current stage if it were only a pure play EV manufacturer with, although of course we’ll never know.
And then there are the many conflicts of interest as Musk is Tesla’s CEO and SolarCity’s chairman and also SolarCity CEO Lyndon Rive’s first cousin. Additionally, he owns 22% of SolarCity. Jonas believes investor scrutiny may be heightened further because of these conflicts even though the companies are mitigating them by recusing the parties from the shareholder vote. He points out that some of Tesla’s success can be attributed to the markets’ willingness to fund all this cash consumption. Further, news of the bid comes only about a month after Tesla’s last capital raise.
Few synergies, great cash burn in Tesla’s bid for SolarCity
Barclays analyst Brian Johnson, who has an Underweight rating and $165 price target on Tesla Motors Inc (NASDAQ:TSLA), said in his report that he sees little in the way of synergies and much in the way of cash burn in the transaction. Barclays is also bearish on SolarCity with an Underweight rating and $20 price target, although the firm adds that Tesla’s offer is a “timely lifeline” for the struggling solar company.
Johnson believes the rationale for the offer is for SolarCity to be able to tap into capital, as SolarCity has pretty limited access while Tesla’s access to capital at favorable rates is fairly open. However, he thinks that if the transaction is allowed to close, it will only “magnify the losses and cash burn that both were seeing individually.” As a result, he said Tesla will need to raise even more capital soon.
He does see the possibility for SolarCity Corp (NASDAQ:SCTY) to reduce its customer acquisition costs by leveraging Tesla’s sales network and brand. However, he doesn’t see much benefit for Tesla. He doesn’t think solar panels on cars make much sense, calling them “largely cosmetic,” and also believes powering Tesla recharges using SolarCity panels will be difficult because the majority of recharges occur at night. He also doesn’t think Tesla’s stationary energy storage systems make sense at a time when net metering is so big.
Tesla downgraded by Oppenheimer
Oppenheimer analyst Colin Rusch went so far as to downgrade Tesla to Perform based on its bid to acquire SolarCity. He doesn’t see the acquisition as “the best and highest use of SLA’s capital and human resources given the potential return on capital possible in the electricity industry (typically ~8%-9%) versus the potential leverage of the TSLA auto platform.” He pegs the return on invested capital for Tesla’s auto platform at 15% to 20%.
He expects the shareholder fight over the offer to be “robust” and focused on the many corporate governance issues associated with it. He agrees with Barclays that the deal would be good for SolarCity but bad for Tesla. In fact, he sees a huge problem with the gigafactory because part of the facility is expected to sell into the stationary storage market. He believes acquiring SolarCity will put Tesla in competition with its own customers in stationary storage after the gigafactory is up and running.
Also Stifel downgraded SolarCity from Buy to Hold.
Tesla shares are down 8.8% at $200.28 as of this writing, while SolarCity shares are up 4.77% at $22.20 after surging by as much as 16% in premarket trading, opening at $27.76 this morning.