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.

Uh, helloooooooooo everyone. There's a return of more than 150 percent just going begging in the market right now. A windfall just in time for the holidays. But you guys are just sitting there.

This is the, er, gift that is the Tesla Motors-SolarCity deal. During trading on Friday, the spread between SolarCity's shares and the offer implied by Tesla's all-stock offer hit a new record of almost 25 percent.

Faithless
SolarCity's spread to Tesla's offer has reached staggering proportions
Source: Bloomberg
Note: Data through July 29th reflect mid-point of preliminary offer range.

From a merger arbitrageur's perspective, that chart looks a little different. For them, the $5-and-change gap between Tesla's offer and SolarCity's stock implies an enormous annualized return if the deal closes as scheduled sometime in the fourth quarter:

What Are You Waiting For?
SolarCity's deal spread implies an annualized return of more than 150 percent for a brave arb
Source: Bloomberg, Bloomberg Gadfly analysis
Note: Gross implied annualized return assuming deal completes on December 1st, 2016.

The key phrase there is "if the deal closes as scheduled." As I discussed here, that spread indicates most merger arbs either don't believe it will or think that, if it does, layering SolarCity's cash burn on top of Tesla's own sizable challenges will seriously damage the currency they'd end up owning -- namely, Tesla's stock.

With Tesla contemplating another capital raise already -- as GM breathes down its neck with a new rival vehicle -- and the merger filing revealing a valuation process by the two companies' banks that could pass for comedy, there are plenty of good reasons to see that fantastical return as just that: fantastical.

It's hard to think of another deal with such an implied return embedded in it. Fellow Gadfly Gillian Tan wrote here about the spread in the $1.65 billion private equity bid for Cvent, which has widened on antitrust concerns. But assuming that deal's completion date has been pushed out to late October at the earliest, its implied 100 percent-plus annualized return doesn't match SolarCity's. Earlier this year, Williams Cos. stock at times traded at a discount of more than 30 percent to Energy Transfer Equity's increasingly reluctant offer. That, of course, didn't end so well.

In a normal situation, SolarCity's spread might be 50 to 75 cents per share, offering an annualized return around 15 to 20 percent. At the actual spread, it looks like this deal is headed for the buffers, as Tesla shareholders balk at taking on the extra risk or, at least, demand another cut to the exchange ratio. I guess you guys know what you're doing.

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