Elon Musk isn’t afraid to think big.
His Tesla Motors has become the leading manufacturer of electric vehicles. Its new Model 3 is set to roll out the end of next year with a price tag as low as $35,000.
His SpaceX rocket company carved out a place in the space market and has shown it can safely return rocket boosters for reuse.
But analysts and investors are wary of Musk’s latest proposal, a bid worth as much as $2.8 billion to combine Tesla with SolarCity, the company planing to operate North America’s biggest solar panel factory in South Buffalo.
Investors and Wall Street analysts haven’t been impressed by Musk’s grandiose vision.
They’re more focused on the two companies today and how the proposed merger would play out in the short term.
Here are three reasons why the Tesla-SolarCity deal may not be the “no-brainer” Musk says it is.
Neither company is profitable. And both are burning through cash at a rapid clip.
Tesla lost $889 million last year on its $4.05 billion in revenue.
SolarCity lost $769 million on just $504 million in sales.
And both companies have a voracious appetite for cash. SolarCity finished 2014 with $525 million in cash on hand. It was down to $362 million by the end of March, and Morgan Stanley analysts expect SolarCity to burn through another $364 million in cash next year. That puts immense pressure on SolarCity to keep raising capital, including about $2 billion in funding this year, according to CreditSuisse analyst Patrick Jobin.
While Tesla is in a better cash position, with $1.4 billion in cash on hand, the company is going to need even more as it prepares for the Model 3 launch late next year. The company said last month it planned to sell about $2 billion in stock.
What’s more, Tesla would assume about $2.5 billion in SolarCity debt, much of it backed by payment streams generated by the electricity generated by its residential rooftop systems.
Analysts pushed Musk for details about the potential cost savings the merger would yield. Musk said those estimates would have to wait until a merger agreement was signed, possibly in a matter of weeks.
But some analysts are skeptical the savings will be substantial.
“The combined entity is likely to magnify the losses and cash burn that both were seeing individually,” said Brian Johnson, a Barclays analyst, in a report.
A distraction for Tesla
Tesla already has a lot going on. The company is getting ready to open its battery gigafactory in Nevada. The rollout of its Model 3 will likely push its electric vehicle production to a much grander scale, rising from 50,000 in 2015 to a projected 500,000 in 2018.
So why would Tesla want to add SolarCity, especially as the company is pushing ahead on plans to open one of the world’s biggest solar panel factories in Buffalo?
“A company can only fight so long on so many fronts,” said Roth Capital analyst Philip Shen.
Musk disagrees. Combining SolarCity’s solar power systems with Tesla’s electric vehicles and storage batteries would create a powerful sustainable energy company that could help wean the world off gasoline-powered vehicles and fossil-fueled power plants.
The benefits of the deal are “pretty obvious,” Musk said.
“This is what the world needs,” he said. “This is the earth’s solution.”
But not all investors are viewing the merger as part of such a big picture.
“Big-thinking investors will probably like this approach, as it shows why Tesla’s market cap could eventually exceed ‘plain vanilla’ peers in the automotive industry – none of whom have the guts to expand outside their own industry,” Piper Jaffray analyst Alexander Potter wrote.
“However, with the Model 3, Tesla already is subjecting itself to one of the most ambitious, and probably one of the least achievable, production ramps in automotive history,” he wrote. “Integrating SolarCity won’t make this process any easier.”
All in the family
Tesla and SolarCity are already closely entwined, raising questions from some analysts about whether the proposed merger is clouded by conflicts of interest.
For starters, Musk is both Tesla’s CEO and SolarCity’s chairman. He owns more than 21 percent of Tesla’s stock and 22 percent of SolarCity’s.
Musk’s cousins are Lyndon Rive, SolarCity’s CEO, and Rive’s brother Peter, the solar panel company’s chief technology officer.
The close ties extend to each company’s board of directors. Tesla’s board of directors includes Musk’s brother Kimbal and Brad Buss, who was SolarCity’s chief financial officer until he retired earlier this year.
SolarCity’s board includes Jeffrey Staubel, Tesla’s co-founder and chief technology officer, and both Rive brothers.
Investor Antonio Gracias serves on both boards, but he and Musk, along with Lyndon Rive at SolarCity, have agreed to recuse themselves from the board votes.
That leaves three unaffiliated directors on each company’s board, but a Silicon Valley venture capital firm, Draper Fisher Jurvetson, has a representative on each board. If those seats aren’t counted as unaffiliated, that would leave just two directors at each company without family or business ties.
“There are many corporate governance challenges,” Jobin said.