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.

Tesla's latest effort to sell the SolarCity deal to investors has come in the nick of time. Just before the company's latest update on why buying SolarCity is a good thing dropped, Tesla Motors Inc. stock closed on Tuesday at $190.79.

That number matters. At the exchange ratio of 0.11 Tesla shares per SolarCity share, the latter's investors are currently being offered paper that is worth $20.99 -- or 20 cents less than where the company closed on June 21, just before the deal was first mooted. In other words, whatever takeover premium they thought they were getting has not merely been wiped out; it just closed in negative territory for the first time.

Sundown
Tesla's implied takeover premium for SolarCity versus its undisturbed share price has evaporated
Source: Bloomberg, the companies
Note: Data prior to August 1 reflect the mid-point of Tesla's initial proposed exchange offer.

One curiosity that has never been quite resolved throughout this entire process is why SolarCity -- which by Tesla's latest account is financially healthy and on the cusp of big profit improvements -- would have chosen to sell out now. I mean, look at this:

Let's Talk Timing
SolarCity took a deal at less than half its 52-week high
Source: Bloomberg

With the shareholder vote on the deal due on November 17, Tesla's update was designed to reassure that owning SolarCity is both an absolute necessity in strategic terms and wouldn't damage the electric-vehicle maker's own finances in the process. That such an update, simultaneously assertive and defensive, is required at this late stage is notable in itself.

By Tesla's reckoning, investors don't appreciate SolarCity's financial strength, saying it will "add more than half a billion dollars in cash" to Tesla's balance sheet over the next 3 years.

It's a bold statement, given SolarCity's persistent cash burn and recent reliance on selling bonds that mostly went to Chairman Elon Musk (also CEO of Tesla) as well as other related parties. It is also at odds with SolarCity's dreadful latest set of quarterly results, where the company actually went to the trouble of announcing a post-quarter cash balance to show it was higher than the June 30 figure.

Tesla reiterated on Tuesday that SolarCity's cash balance continued to recover in the third quarter and expects this to keep climbing to year-end. It also pointed to recent deals with banks to raise project funding, along with anticipated synergies of $150 million a year.

However, one of the more prominent areas of savings -- namely, efficiencies created by cross-selling home solar and electric vehicle projects -- blurs the line somewhat on cost savings and squishier revenue synergies. That squishiness looks even more pronounced given that, when asked on Tuesday's Q&A call, the company couldn't offer any hard data showing customers really do want to buy solar panels or a roof along with their new car. 

The fact is, Tuesday evening's call -- like the other calls in June and August and last week's showy, but detail-light, unveiling of an upcoming solar-roof product -- looks like part of an ever-more-concerted effort to get this deal across the finish line. Tesla's own third-quarter results, released last week, similarly smacked of a company straining to show it can actually turn a profit to convince investors it knows what it's doing as its ambitions multiply.

SolarCity's own quarterly results won't actually arrive until Wednesday, November 9. That will be just over a week before the shareholder votes are due to be held. It will also be a day after another vote you may have read about, so try not to be too distracted, as it will represent the last set of details on the state of SolarCity's balance sheet and whether the company has made any progress curtailing stubborn unit costs.

SolarCity's own investors may not care too much what these show. After all, despite the disappearance of the takeover premium, the stock still trades at a discount of less than 10 percent to Tesla's implied offer. This gap actually narrowed somewhat on Tuesday.

Clinging On
Even as Tesla's acquisition currency has faltered, SolarCity's stock has tightened its bond with it
Source: Bloomberg, Bloomberg Gadfly analysis
Note: Data through July 29th reflect the mid-point of Tesla's original proposed offer range.

The real audience, as ever, is Tesla's own shareholders. Whether they will be convinced may not be as close a call as some think next Tuesday's election will be. Still, the stock did close at roughly an 8-month low on Tuesday -- and then fell further in after-hours trading, even as Tesla made its pitch. It doesn't look like this one's in the bag yet.

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