Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Things got awkward on SolarCity's earnings call last month when an analyst had the temerity to ask: "What is SolarCity?" How easy it would have been for CEO Lyndon Rive if he could have simply responded: We're a subsidiary of Tesla.

Well, now's his chance. Tesla Motors, run by Rive's cousin Elon Musk, dropped a late bombshell on Tuesday with an offer to buy the solar power company. SolarCity's stock, a favorite of short sellers, leaped 18 percent in after-hours trading, while Tesla's sank 11 percent. In truth, both sets of shareholders should beware.

The timing is odd, to say the least. Tesla's all-stock offer is pitched as providing SolarCity's investors with a premium of 21 to 30 percent, based on a proposed valuation band that's subject to completing due diligence (itself an unusual proposal). But it's worth looking at how that proposed band compares with how the two stocks have traded over time:

You Can Choose Your Relatives
SolarCity's relative valuation to Tesla's stock price had collapsed ahead of the bid
Source: Bloomberg, company filing

SolarCity recommending this deal at this price would be telling, indeed.

Tesla is jumping in as SolarCity's entire business model is being openly questioned amid rapid cash burn and stubbornly high overheads. The company's revamped solar loan product -- as opposed to its usual business of leasing panels -- looks like an effort to raise cash at the cost of future profitability. Tesla swooping in now can look opportunistic or like a mission of mercy, depending on your point of view. Musk owns just over a fifth of each company, according to Bloomberg data, although Tuesday's offer letter said his stake won't factor into a shareholder vote on the deal. 

On the subject of that letter, it's worth considering the rationale laid out. There's none of the usual talk of accretion -- how could there be when both companies are solid loss-makers? Instead, the general flavor of Tesla's rationale was summed up here:

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.

It sounds like a compelling vision; a one-stop shop for renewable energy powering where you live and what you drive. SolarCity's workers could put up some panels on your roof and install a Tesla Powerwall home battery, and maybe a charger for your Model S while they're at it. They'll even lend you the money to pay for it. Customers, given their "shared ideals" with the two companies, will want to embrace solar energy in all its forms.

Anything's possible, of course. But while both companies do share a common cause in furthering sustainable energy, their products don't necessarily align quite as seamlessly. When Rive responded to questions about SolarCity's model last month, he said the company's model, at least in the near term, was to "provide energy at a lower cost than you can get it today from fossil fuel." Which is fine, but also suggests that maybe not everyone seeking to cut down the size of their monthly power bills will also be keen to fork over tens of thousands of dollars for a spiffy new car.

Engineering synergies at the back end seem more likely, given the central role for batteries at both companies. But it isn't clear why that requires buying a struggling company with an army of sales people and panel installers.

What is clear is that Tesla so far this year has already made pledges about living within its means, only to then boost its spending plans and tap shareholders for $2.3 billion of fresh capital. Its existing mission of transforming the global car business is challenging enough that Musk says he sometimes camps out overnight at the factory. And Tesla's new, accelerated growth target, while offering a thrill, compounds the challenge. Don't forget that Tesla has also been the subject of wild speculation about the new businesses it could venture into, such as robo-taxis, with finger-in-the-air price targets to match. And now, on top of all this, SolarCity is to be thrown into the mix.

Tuesday evening, not long after news of the offer broke, Tesla's valuation had dropped by $3.8 billion in after-hours trading -- 1.8 times the entire market capitalization of SolarCity before the announcement. Awkward, much?

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net