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.

And you thought referendums were a terrible way to decide things?

There's been much gnashing of teeth in the possibly soon-to-be Disunited Kingdom about how 52 percent of 72 percent of the population -- so about 37.4 percent overall -- had the power to take the country out of the EU.

Now consider SolarCity. It's unlikely any troubles there will necessitate a global financial freakout. But its election math is starting to look even more tenuous. Two more directors have recused themselves from voting on whether to recommend Tesla Motors' takeover proposal, announced last week. That brings the number of abstainers to five out of eight.

One of the latest two is Peter Rive, SolarCity's technology chief and, like his brother CEO Lyndon Rive -- also recused -- a cousin of Elon Musk, who is the biggest shareholder in both companies, chairman of SolarCity and chairman and CEO of Tesla. The second of the two, JB Straubel, is the technology chief over at Tesla, which he also co-founded.

That's right: the boards at SolarCity and Tesla would make a great ad for LinkedIn.

If the three remaining directors vote unanimously in favor of Tesla's offer, then it will have the support of an uncannily Brexit-like 37.5 percent of the entire board. If it's a 2-to-1 split, then that support sinks to 25 percent.

My colleagues at Bloomberg News report that SolarCity is looking into establishing a special committee to review the deal. And, of course, SolarCity's board doesn't decide on the deal going through; that will be up to the shareholders of both companies.

Still, it is remarkable that the votes of just three directors could be the only stamp of approval this deal gets. Since the offer was announced, SolarCity's stock has been trading at a fairly wide and persistent discount to the range Tesla has proposed (which is based on its own share price, as the offer is all in stock).

Obvious?
At the mid-point of Tesla's offer, SolarCity's stock has traded at a discount of around 9 to 12 percent
Source: Bloomberg

In one sense, though, the recommendation of SolarCity's three board members, and even its shareholders, looks somewhat moot. The real decision to be taken here will be by the shareholders of Tesla. And thus far, they may not like what they see.

Raining on the Parade
Tesla's loss of value since the announcement far exceeds SolarCity's entire market cap
Source: Bloomberg

As of Monday, the loss in Tesla's market cap since last Tuesday's surprise announcement is about $4.5 billion -- more than twice SolarCity's entire worth. The transaction's questionable logic and likely impact on Tesla's cash burn and balance sheet has rightly rattled its normally compliant investors. SolarCity's sudden shrinkage of eligible directors for the board vote adds to the sense this proposal came together very suddenly, which is also hardly reassuring.

As I wrote here, perhaps the biggest risk in all of this is the damage it does to Musk's brand, a vital resource for Tesla's valuation and ability to tap investors for funding. The board issue doesn't help on that score. The one saving grace may be timing -- at least some of Tesla's drop in value can be blamed on those Brexiteers.

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