Deals

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.

"We're trying to have the non-weird future get here as quickly as possible."

That was Elon Musk on a Wednesday morning call rooted in a decidedly weird present. His explanations of why it makes sense for Tesla Motors to buy SolarCity were heavy on long-term vision, light on the actual near-term benefits for shareholders of two companies that collectively burned through almost $5 billion of cash last year. Besides holding out the prospect of transforming Tesla into a $1 trillion company, there was talk of "the tide of history" and "alien dreadnoughts," and a lengthy discourse on the subject of volumetric efficiency in manufacturing.

What there wasn't much of was financial detail on synergies. Tesla says this is because Musk's shareholding in both companies required it to make its offer public before due diligence could be completed -- something it characterized as providing more transparency, despite the lack of details.

On the subject of cross-selling home solar systems and electric vehicles -- one of the central pillars of the stated rationale -- one analyst asked what Tesla found when it surveyed existing owners' potential interest in buying solar equipment. In response, Musk quipped it was better to "look through the windscreen" than in "the rear-view mirror" before saying solar's penetration in the market is low and that, therefore, the opportunity is huge -- a long-established selling point for a standalone SolarCity that didn't really answer the question.

It's also a selling point that hasn't really persuaded investors to, you know, actually own SolarCity's stock lately. This gets to the heart of the deal: Investors just aren't buying SolarCity's story anymore, but there remains enough faith in the Tesla story to let that company shore up its renewable-energy compadre.

Different Beliefs
Indexed stock performance
Source: Bloomberg

Musk maintains SolarCity could raise capital on its own if it wanted to, dismissing the idea that Tesla is bailing out the company as "obviously" false. But if SolarCity could raise capital at a reasonable cost, then why wouldn't it do that, rather than succumb to an all-stock takeover offer that, as of now, prices the company at roughly half of what it traded at only six months ago? Since last October, SolarCity has tried to reduce stubbornly high operating expenses resulting from its rapid expansion, with little to show for it, other than missed growth targets. Its recent deal to raise cash by selling the cash-flow streams from a portfolio of leases to John Hancock Financial, as well as its renewed push into solar loans, belie the idea of easy access to capital. Take a look at the yield on SolarCity's convertible debt.

All-Electric Convertible
SolarCity's cost of capital has blown out but the prospect of a Tesla takeover had an immediate impact
Source: Bloomberg
Note: Mid yield-to-maturity

Musk says that, once acquired, SolarCity can leverage Tesla's sales channels to substantially cut stubborn selling costs. He is "highly confident" meaningful benefits would show up within two quarters of the deal closing, a remarkably fast timetable. He also said new panel technology from Silevo, which SolarCity acquired in 2014, would have a big impact.

Here's the thing: 'Vision' is part and parcel of building a new company in a very new industry and persuading investors to fund it. Breakthroughs don't happen without it, and Tesla can lay claim to have made significant breakthroughs.

But the lesson of SolarCity is that vision is only as good as the faith it attracts. And faith in SolarCity's vision -- which has always benefited partly from its association with Musk -- has dwindled sharply. In selling itself to Tesla, SolarCity would become part of a vision that still has a strong following, but isn't helped by the lack of clarity displayed Wednesday morning.

The flip-side? Selling out at this low price would confirm SolarCity has lost faith in itself. What's worse is that, judging by investors' reaction to the news, bringing SolarCity in-house won't just dilute Tesla's earnings, but also risks diluting its vital resource: belief in Musk.

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