Tesla makes best of perplexing SolarCity deal

August 1, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

Tesla Motors’ deal to buy SolarCity, officially unveiled on Monday, is still perplexing. But at least boss Elon Musk’s electric-car pioneer is making the best of the terms and process. At $2.6 billion, the price for the solar-panel installer he chairs is lower than expected, and the two boards have done the right things. But it still risks distracting $35 billion Tesla at a critical time.

There is some industrial logic. The deal will bolt the country’s largest solar-panel installer onto Tesla’s battery business for cars, homes, businesses and utilities. This overlapping area is where most of the $150 million in expected annual cost savings will come from, covering sales, marketing, installation and servicing.

There’s logic in the deal math, too. Assuming they materialize – which may be hard to judge amidst the changes inherent in such fast-growing businesses – the anticipated synergies, on a multiple of 10, are theoretically worth $1.5 billion given both companies lose money and so essentially don’t pay tax. That equates to two-thirds of the acquisition price and several times the roughly $340 million premium.

Yet the carmaker’s foremost goal is to produce 500,000 vehicles annually by 2018 – almost 10 times production in 2015. That’s a lofty target, especially for a company with a habit of missing them. Owning SolarCity might mean having more people available to install home chargers, but the solar firm has challenges of its own which could eat into management time and dilute Tesla’s focus.

That in turn is why the family and ownership connections between the two companies raise potential concerns about the motivations for the deal. Chief among the potential conflicts of interest is that Musk chairs and owns about a fifth of both firms, while his cousin, Lyndon Rive, is chief executive of the solar company.

Independent board members at both companies OK’d the transaction, majority approval from unrelated shareholders at both firms will be required, and Musk has committed to vote his SolarCity shares in favor of a better offer if, after a 45-day period, the company secures one. That’s an exemplary approach. Even so, there’s still the nagging question of why Tesla would bother buying and integrating a solar-panel player at this moment, if at all.

2 comments

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It doesn’t seem to hard to figure out to me. SolarCity is on of the country’s largest Photovoltaic Installers and next year will start producing their own PV modules. Tesla is about to start producing huge numbers of batteries. Due to the falling prices of both PV installations and batteries, advances in PV inverter technology, utility push back against net metering in many markets, and Hawaii no longer allowing any new grid backfeed of solar, PV plus battery storage system installations are going to expand rapidly. Tesla buying SolarCity will effectively turn much of its battery wholesale sales to retail sails, raising the value of much of their future battery sales by 20 to 30%.

Posted by BandGap | Report as abusive

Isn’t the deal explained by the fact that Tesla’s battery plant needs to get to 4 times Tesla’s current battery consumption in order to operate at maximum efficiency?

Posted by Bob9999 | Report as abusive