SolarCity Corp (SCTY.O) agreed to Tesla Motors Inc’s (TSLA.O) $2.6 billion offer to buy the solar panel installer, the companies said Monday, clearing one obstacle in the way of Elon Musk’s ambitious plans for a carbon-free energy and transportation company.
Tesla’s stock swap offer valued SolarCity at $25.37 a share, or $200 million less than the initial proposal that Musk outlined in June, before advisers to the companies had done due diligence.
SolarCity shares closed last Friday at about 5 percent above that level. They fell on Monday and at midday were trading below the offer price.
Tesla’s offer represents about half of SolarCity’s value a year ago, a tumble the reflected its slowing growth, complex financial structure and the increased scrutiny of government incentives needed to make rooftop solar pay off for homeowners.
Tesla shares also dipped, as Musk repeated that if the deal is consummated, the combined Tesla-SolarCity could require a “small equity capital raise” next year. Up to Friday’s close, Tesla shares were up 7 percent since the company first announced its proposal.
Musk, chairman of both Tesla and SolarCity, said a capital increase could be a “low to mid single digit” percentage of Tesla’s market capitalization, which stood Monday at about $34 billion.
Both companies have been burning through cash, although they have projected achieving positive cash flow later this year. SolarCity Chief Executive Officer Lyndon Rive, who is Musk’s cousin, repeated that forecast during a conference call Monday.
Some analysts are skeptical that combining Tesla and SolarCity will yield a quick turnaround. “When two highly leveraged companies that have to raise huge amounts of capital merge, you don’t get a stronger company. You get a larger company that combines the weaknesses of both smaller companies,’ said Erik Gordon, a professor at the University of Michigan Ross School of Business.
Musk said the plan to consolidate two clean energy businesses in which he has large stakes will remove barriers to growth between companies he always intended to function as one.
Musk and Tesla Chief Financial Officer Jason Wheeler said the two companies could save at least $150 million a year by combining sales forces, and sending one truck to a home to install solar panels, a Tesla energy storage system and a recharging system for a Tesla car. Now, as many as three trucks and technicians might go.
Musk said a combined SolarCity and Tesla should be able to spend less on manufacturing and capital investments than they would have separately, and will be able to negotiate deals with utility companies more quickly.
Musk said Tesla and SolarCity are already working on consolidating and sharing key technologies, such as electronic power controls. “If it doesn’t go through, it will be awkward,” he said.
Delivering on the promises will add more tasks to Tesla’s ambitious agenda. Over the next two years, the luxury electric carmaker plans to increase Tesla’s vehicle production roughly fivefold at its Fremont, California, assembly plant as it starts making the Model 3 sedan and related vehicles.
Tesla later this year plans to start production of car batteries at its giant Gigafactory near Reno, Nevada. Tesla and partner Panasonic Corp (6752.T) have begun installing complex, automated battery manufacturing equipment in parts of the plant as construction continues on the complex. Musk has said the Gigafactory ultimately will have solar power systems on its roof.
Musk is the largest shareholder in both companies. His cousins Lyndon Rive and Peter Rive are co-founders of SolarCity. The companies share board members and major shareholders. SolarCity formed a special committee to evaluate the Tesla offer, and Musk said he had no say in the final acquisition price.
Final approval of the deal will depend on independent shareholders. The deal includes an unusually long “go-shop” provision that allows SolarCity to solicit offers from other potential buyers for 45 days through Sept. 14.
Musk and sources familiar with the situation have said they are confident the deal will win the needed support.
Daniel Marcus, principal of Marcus Capital LLC, a Chicago investment adviser which owned 22,100 Tesla shares at the end June, said he supports Tesla’s takeover bid for SolarCity and Musk’s long-range plan.
“If some people see things three steps ahead, Elon Musk is 10 steps ahead,” Marcus said.
Musk has wooed larger shareholders, including managers at Fidelity Investments whose funds are among the biggest owners of both SolarCity and Tesla stock, outside of Musk.
Under the proposed agreement, Tesla shareholders will get 93.5 percent of the combined companies and SolarCity, 6.5 percent. The deal is expected to win regulatory and shareholder approvals in the fourth quarter, the companies said.
In early afternoon trade, SolarCity fell 6.6 percent to $24.95 while Tesla dropped 1.1 percent to $232.30.
(Reporting by Swetha Gopinath in Bengaluru, Liana Baker in New York, Paul Lienert in Detroit and Nichola Groom in Los Angeles.; Editing by Joseph White and Jeffrey Benkoe)