Share this article

print logo

Tesla’s tumbling stock cuts premium for SolarCity shareholders

The sell-off in Tesla Motors stock since its bid to acquire SolarCity was announced this week is making the deal less lucrative for the solar energy systems installer’s shareholders.

When the deal first came out Tuesday afternoon, Tesla’s bid valued SolarCity’s shares at 25 percent to 35 more than their trading price that day.

By the end of Friday, the premium for SolarCity shareholders to accept Tesla’s offer had shrunk to between 6 percent and 14 percent.

What happened?

Tesla didn’t reduce its offer, but because its bid essentially would pay SolarCity shareholders, not in cash, but by swapping their shares in the solar energy company for Tesla stock, the value of the takeover proposal fluctuates with changes in the share price of Tesla and SolarCity.

And since Tesla’s shares have tumbled by more than 10 percent since the bid was revealed, while SolarCity shares have inched higher, the size of the premium – or the above-market price – that Tesla is offering to pay has dropped, as well.

That’s because Tesla’s bid would give SolarCity’s shareholders between .122 and .131 shares of Tesla stock for every SolarCity share that they own.

When the deal was announced, Tesla’s stock traded for $219.61, so each SolarCity share would be exchanged for Tesla stock valued at $26.50 to $28.50 per SolarCity share.

But because the electric vehicle maker’s shareholders have reacted warily to the proposed deal, Tesla’s shares have been steadily dropping, falling to $193.15 on Friday. At that price, SolarCity’s shareholders would get $23.56 to $25.30 in Tesla stock for each of their shares. With SolarCity stock closing at $22.20 on Friday – up less than 5 percent since Tuesday – the value of the premium that Tesla is offering has essentially been cut by more than half, based on Friday prices.

It’s typical for the shares of a company that is being acquired to rise after a takeover bid is revealed, but SolarCity’s increase has been unusually small, leaving a significant gap between its trading price and the value of merger offer. Even if you ignore SolarCity’s modest rise since the bid was announced, the premium still is significantly smaller, at 11 percent to 19 percent over SolarCity’s closing price Tuesday.

Morgan Stanley analyst Stephen C. Byrd looked at the premium offered by Tesla another way. Noting that SolarCity CEO Lyndon Rive has, in his very limited comments, spoken favorably toward the deal, saying he was “very excited” about it.

But Byrd noted that Tesla’s bid, even at its original value of as much as $28.50 per share, is well below the recent highs of a stock that traded for as much as $57 as recently as mid-December.