Autos

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.

So Elon Musk won and Travis Kalanick lost. Actually, it's complicated.

Musk's firm Tesla Motors has announced that Musk's SolarCity had recommended Tesla's takeover offer -- and at a lower price than the initial range Tesla put forward in June, more in step with actual trading. Musk emphasized on a Monday morning call that this isn't a done deal yet, but it has moved a big step closer.

Market Cues
The actual exchange ratio between SolarCity and Tesla has averaged 0.114, close to the agreed ratio of 0.11
Source: Bloomberg

The evening before, Kalanick's Uber announced it was throwing in its lot in China with local rival Didi Chuxing, a move that could be seen as a strategic retreat in a potentially huge market.

In reality, Uber's deal is the winning one. As fellow Gadfly Tim Culpan explained here, Uber will stem losses in China that reportedly top $2 billion already, get a cash infusion to fund further growth and get a 20 percent stake in a combined, dominant ride-hailing company in the country. Total victory? No. What Uber needs in terms of cash and readying it for an eventual IPO? Yes. As Kalanick put it in a blog post about the deal:

Getting to profitability is the only way to build a sustainable business that can best serve Chinese riders, drivers and cities over the long term.

In theory, Tesla's deal with SolarCity is all about getting to sustainable profits, too. The touted synergies figure -- "conservative" according to Musk's gut feel -- of $150 million equates to almost a fifth of SolarCity's operating expenses in the 12 months that ended in March, according to figures compiled by Bloomberg.

But it's hard to escape the image of Tesla shoring up a sandcastle on that front. On the same day, SolarCity cut its guidance for installations this year by about 10 percent. The mid-point, 950 megawatts, is now almost a quarter below the target SolarCity gave six months ago when announcing 2015 results.

And the fewer panels deployed, the harder it is to shift the needle on SolarCity's number one problem: stubbornly high unit costs.

Overhead Ache
SolarCity's unit cost of solar panels deployed
Source: the company
Note: Excludes research and development expenses and corporate capital expenditure.

SolarCity is sticking with its target of breaking even in terms of cash flow by the end of this year -- although that will be rendered essentially meaningless if it is folded into Tesla by then. That SolarCity is recommending shareholders take Tesla's all-stock offer at a lower exchange ratio than even the already fire-sale level mooted less than two months ago is a more telling position.

That the recommendation comes from all of two directors, with most of SolarCity's board recused, doesn't exactly instill confidence, either. For his part, Musk, who owns roughly a fifth of each company and won't vote on the deal, on Monday dismissed reporters raising concerns about conflicts of interest as "silly buggers." So there.

Tesla, for its part, continues to tout the benefits of integration, chiefly in terms of better manufacturing, being able to sell all-in-one packages of electric vehicles, panels and batteries to customers and install them all together. 

But these are unproven, and the specifics remain cloudy. Asked for more detail on synergies, say, or targets on deploying storage products, Tesla and SolarCity demurred on Monday morning.

Like Musk's latest master plan, the vision is intoxicating, but the practical questions on getting there remain largely unanswered.

Tesla burns cash at a ferocious rate and keeps upping the ante on what it is trying to achieve in justifying its regular trips to the equity market to raise more cash. With its hands full already in terms of launching the Model 3 and completing the Gigafactory, Tesla would do well to take a leaf from Uber's book and swap a little ambition for practicality.

Taking on SolarCity, a struggling specialty finance and construction business, adds more complexity, debt and cost in return for expected synergies -- a "show me" proposition at the best of times. Yet Musk frames all of this in terms of it being "obvious" or a "no brainer"; something that only the "silly buggers" don't get. Well, guilty as charged, I guess.

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