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Analysts question Tesla-SolarCity merger

To Elon Musk, merging Tesla Motors and SolarCity is a “no-brainer” that would make both companies stronger, and move closer toward his vision of creating a sustainable energy giant built around solar power, batteries and electric cars.

Wall Street isn’t so sure.

Analysts raised questions about whether the $2.8 billion takeover bid would be a distraction for Tesla’s management at a time when the electric car maker is rolling out a more affordable model and moving to open a battery “gigafactory” in Nevada.

They questioned whether the deal was too cozy, potentially combining two companies where Musk owns more than 20 percent stakes in each, and serves as the CEO of Tesla and the chairman of SolarCity.

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Musk and his cousins, SolarCity CEO Lyndon Rive and Chief Technology Officer Peter Rive, came up with the idea for SolarCity during a trip to the Burning Man festival a decade ago.

“Shareholders should be concerned about the transaction, given Elon’s ties to both companies,” said Ben Kallo, a senior research analyst at Robert W. Baird & Co., in a research note.

Some wondered whether the deal was a bailout for SolarCity, which has cut its growth targets twice over the past year. It faces a constant need to raise capital so it can finance its no-money-down business model for installing solar energy systems on residential rooftops.

And others said they expected Tesla to eventually raise its bid for SolarCity. While Pavel Molchanov said he liked the idea behind a merger that would turn Tesla into “a kind of clean tech supermarket,” the Raymond James analyst also thought SolarCity was worth $30 a share or more.

To be sure, Tesla investors did not embrace the deal. Tesla shares fell by 10 percent on Wednesday to $196.66.

The deal was better received by SolarCity investors, who bid up the company’s battered shares by 3 percent to $21.88. But even that advance left SolarCity shares well below the $26.50 to $28.50 per share that Tesla offered to pay – an indication that investors were skeptical about the deal’s chances for approval.

Patrick Jobin, an analyst at Credit Suisse, gave the deal just a 20 percent to 40 percent possibility of being approved.

“Given the corporate governance questions and likely shareholder opposition, we believe this will not be a simple acquisition,” he wrote in a research note.

Rod Lache, managing director at Deutsche Bank Securities, took issue with Musk’s description of the deal as a “no-brainer.”

“It’s not a no-brainer,” Lache wrote in a report. “It could produce a distraction while management would benefit more by focusing on their impressive growth plans” as Tesla ramps up production of its electric cars.

Musk, however, said during a conference call Wednesday that a merger makes a lot of sense.

It would allow Tesla to sell rooftop solar energy systems to its already environmentally-conscious electric car buyers, reducing SolarCity’s stubbornly high customer acquisition costs by turning Tesla electric car stores into solar energy showrooms, as well.

“When we’re selling someone a Tesla, they’re almost always interested in solar,” Musk said. It also would make it easier for the two companies to develop affordable battery systems that could be paired with SolarCity’s solar arrays – a collaboration that would be more complex, and maybe impossible if the two firms remained separate.

“If we give a special deal to SolarCity, and SolarCity isn’t part of Tesla, then why are we doing that?” Musk said.

And it would position Tesla squarely in the heart of the sustainable energy industry.

“In order to solve the sustainable energy question, we need sustainable production, which is going to come overwhelmingly from solar, in my view,” Musk said.

Gov. Andrew M. Cuomo expressed optimism about the potential merger on Wednesday, but he also struck a note of caution.

“First, we have to see whether or not it happens,” Cuomo said. “A lot of times you hear about these financial transactions, and this one is proposed and we don’t know if it actually will go through. We had no reason to believe it was going to happen, but it would be great if it did.”