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.

Here's a weird chart:

Bang
Tesla's stock price plunged on Thursday morning
Source: Bloomberg
Note: Intraday times are displayed in ET.

And here's a weirder chart:

Huh
SolarCity's stock plunged even harder on Thursday morning
Source: Bloomberg
Note: Intraday times are displayed in ET.

Now, of course, SolarCity's share price is linked to Tesla's because the electric-vehicle maker has an all-stock offer for its struggling sister company on the table. If Tesla tumbles, so does SolarCity.

What's weird is that, at first, it looked like an exploding SpaceX rocket triggered the selloff.

Back in April, Bloomberg View's Matt Levine pointed out that, while Elon Musk is a unifying figure and shareholder at Tesla, SolarCity and SpaceX, he had sensibly kept them as separate companies. But it eventually emerged that Musk had borrowed money from SpaceX, apparently to help fund Tesla, and also that the rocket venture had been buying SolarCity's bonds. Since then, the ties between the Musk family of companies has only deepened

So at first, it seemed like the market's freak-out on Thursday maybe rested on thinking like this:

Screen Shot 2016-09-01 at 12.02.54 PM

Or maybe it was just some algorithms doing their thing.

What's even more remarkable is that neither Tesla nor SolarCity moved much on Wednesday, when some real issues came to light, in the form of a filing with details about their merger plans.

I'm not talking about the valuation analysis of Tesla by its bankers, which factored in such fancies as an 8 percent perpetuity growth rate and comparisons to the likes of Facebook and Under Armour. Or Lazard's fat-finger SolarCity spreadsheet snafu. These are merely amusing.

Instead, it's this bit:

Tesla is currently planning to raise additional funds by the end of this year, including through potential equity or debt offerings ... Such additional funds would be used primarily for tooling, production equipment and construction of the Tesla’s Model 3 production lines, equipment to support cell production at Tesla’s Gigafactory, as well as new Tesla retail locations, service centers and Supercharger locations. Secondarily, if the Merger with SolarCity is completed, the additional funds would also be used to support the additional capital needs of the Combined Company.

While many suspected another Tesla share sale was coming, here it was in black and white with a potential timeline -- and an acknowledgement it may be needed to help fund the "needs of the combined company." As that entity will represent the union of two companies burning a combined $2.6 billion this year through June, according to figures compiled by Bloomberg, those are likely some sizable needs.

It's possible that, though this filing came out on Wednesday, it only hit home with investors on Thursday -- although that would be weird in itself, given the intense interest in all things Musk.

But then you look at this chart:

Panel Beating
SolarCity's discount to Tesla's offer has blown out to its widest level yet, even after the reset on August 1
Source: Bloomberg, the companies
Note: Data through July 29th reflect mid-point of range for exchange ratio proposed initially.

There are technical reasons why SolarCity might be selling off even harder than Tesla in this way, such as the fluctuating costs of shorting the buyer's stock (something that's already had an impact on SolarCity's convertible debt).

But it's getting harder to ignore a more straightforward possibility: that the red flags around cash flow, leverage, dubious industrial logic and, yes, the cat's cradle of interests and money flows between Musk's companies are reaching a point where Tesla's ability to see the deal through is being seriously called into question.

Quite why this might have taken hold on Thursday rather than on Wednesday is something of a mystery. Perhaps it's because it's the first of the month. Or more people read the news about that filing the morning after rather than on the day. Maybe it's got something to do with rockets.

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

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

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