Tesla and SolarCity have about two weeks left to convince shareholders to vote in favor of their merger, and both are pulling out all the stops in an attempt to make it happen. The latest step in the journey was Tuesday night’s presentation, which combined the very short list of numbers that had already been provided with a lot of qualitative arguments and a sprinkling of additional numbers.
Judging by the downward trend in both Tesla and SolarCity shares, it seems investors weren’t overly thrilled with what was said last night. Tesla shares declined by as much as 1.46% to $188.01, while SolarCity shares tumbled by as much as 2.99% to $18.50 during regular trading hours on Wednesday.
Explaining Tesla’s and SolarCity’s rationale
There didn’t appear to be anything in the presentation that would sway either side, although Elon Musk claims that support thus far is huge and that he will be surprised if shareholders don’t approve the merger. The point of last night’s presentation and question-and-answer session appeared to be simply explaining what the management teams of the two companies are thinking in terms of rationalizing the merger. Musk has admitted that he’s been lobbying institutional investors for support in the merger, and last night’s presentation seemed like another round of lobbying, but much broader this time.
Again, the two companies said they expect about $150 million in cost synergies within the first year, most of which will come from sales, marketing and corporate overhead. The company also said again that SolarCity is expected to add more than $500 million in cash to the combined company’s balance sheet over three years.
Debate about the validity of the arguments
Baird analyst Ben Kallo is convinced that a combination will be good for both companies through cross-selling opportunities and by cutting customer acquisition costs for both. He said the solar panel installer should add about 300,000 customers to the automaker’s current customer base of nearly 180,000, thus enhancing the cross-selling opportunities.
However, Goldman Sachs analysts are “more guarded” than the managements of both companies in terms of possible revenue synergies. Tesla and SolarCity expect customers to buy both sets of products, but skepticism about that is understandable. After all, someone who is shopping for a car might not need to put a new roof on their home. Both are major purchases that require planning; it seems doubtful that either could be an impulse buy while shopping for the other.
Changing how SolarCity does business
One thing of note is that Tesla appears to be putting its expertise into action by helping SolarCity shift its product mix. The two companies said 30% of September bookings were cash or loan sales, compared to less than 10% in the first quarter. This is important because the goal seems to finally achieve GAAP profitability, which has been elusive since the company’s inception.
The new business model aims to increase the amount of cash the solar panel installer will get up front because its previous model brings much of the cash over a 20-year period rather than at the time of purchase. This was an important area for Tesla and SolarCity to address because cash flow has been a concern for both companies. However, Tesla managed a surprise profit in the third quarter, at least on paper anyway as bears debate that profit, and Musk seems to think that the automaker will be profitable in the fourth quarter as well.
When asked whether the two companies could do everything Musk proposes to do under a joint venture rather than a merger, he said last night that he doesn’t think JV’s actually work. He believes the result would be a worse product and worse experience for users.