Musk Buys Musk: Tesla’s SolarCity Deal by the Numbers

He loses half a billion dollars in the process. Is it a bailout or a master plan?

Does a Tesla-SolarCity Deal Make Sense?

Elon Musk's Tesla Motors Inc. just made an offer to buy Elon Musk's SolarCity Corp. for as much as $2.86 billion. The mind boggles. 

Musk is the largest SolarCity shareholder, already owning 23 percent of the company, so he would personally profit by as much as $140 million from his shares. On the other hand, he's also the largest shareholder of Tesla, a much bigger company, which fell about 11 percent in late trading after the deal was announced. That cost him about $715 million, so on net he's down about $575 million. Not a great start.

So why is he doing it? There's basically two ways to look at it: Either Musk, 44, is bailing out a beleaguered company that's run by his cousin, Lyndon Rive, or he's consolidating a clean-energy empire at rock-bottom prices. Or both. 

Scenario 1: Musk to the rescue

SolarCity has been getting hammered. Shares had tumbled 60 percent so far this year as the company missed the consensus earnings forecast for three out of four quarters and shifted its focus away from installation growth. The most devastating blow, spiritually speaking, came during the last quarter's conference call when analyst Ben Kallo posed a simple question to executives: "What is SolarCity?"

The implication was that SolarCity had lost its way, shifting its business model to offer a loan program for homeowners to buy solar panels instead of leasing them, and pulling back on installation estimates three times in seven months. "Wall Street thinks it's way too complicated," said Kallo, who covers the company for Robert Baird & Co. Ten companies tracked by Bloomberg had a "buy" rating on the stock prior to Tuesday's announcement, while 11 said "hold" or "sell."  

Scenario 2: An empire rising  

An alternative reading of the offer is that Musk knows a good deal when he sees one. With shares hovering near their lowest prices since 2013, Tesla's proposed 21 percent to 30 percent premium still makes for a historically low valuation of under $2.9 billion for one of the world's biggest rooftop solar installers.

It allows Musk to integrate the three-legged stool of clean energy in a way the world has never seen: electric cars, solar power, and grid battery storage all in one place. If so inclined, you could provide for all of your energy needs without ever leaving the Tesla family. Forget the economies of scale (which are significant), that's just powerful branding. And adding batteries to solar is about to become increasingly common, according to a recent analysis by Bloomberg New Energy Finance

Bloomberg New Energy Finance

Tesla showrooms are swanky modern places of clean-tech worship, and now all that well-heeled foot traffic may benefit SolarCity. Customers could peruse solar panels with home batteries while sipping their Tesla cappuccinos. Musk is promising to make rooftop solar cooler, "including by making solar panels add to the look of your home." The deal, if approved by shareholders, could also help Tesla become a major distributor of utility-scale battery storage and solar power.  

Regardless of any bright future, for now the tie-up translates into a drag on Tesla's shares and a bit more challenge for the world's most challenge-loving CEO. Tesla recently sold $1.4 billion in stock to help pay for a massive expansion, preparing for its most important car, the forthcoming Model 3. The company plans to boost production from last year's 50,000 to 500,000 vehicles by 2018—an incredibly ambitious target that's widely dismissed by Wall Street. And to top it off, Musk's company is in the process of becoming the world's biggest battery producer. 

Oh, and his other company, SpaceX, wants to start landing capsules on Mars beginning in 2018. OK, what's next? 

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