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Tesla offers $2.6 billion for SolarCity, lower shareholder buyout than initial offer

Elon Musk’s vision of creating a sustainable energy powerhouse moved a step closer Monday when Tesla Motors formally agreed to acquire SolarCity in a deal for $2.6 billion – at the low end of the price range spelled out in its preliminary offer – that will combine electric vehicles and battery storage with rooftop solar energy systems.

Merging the two companies would turn Tesla into a one-stop shop for sustainable energy, allowing customers to walk into a Tesla store not only to buy an electric vehicle, but also SolarCity’s rooftop solar panels, to be made at its Buffalo factory.

Customers could also buy a Tesla battery from a Nevada facility now under construction to store that electricity until it’s needed at night.

“The entire deal is essentially driven by the need to bring together the product on the battery side and the product on the solar side,” Musk said during a conference call Monday after the deal was announced.

“The idea is there’s one sales process, there’s one installation process, there’s one service contact and there’s one phone app to monitor things,” Musk said.

That type of consolidation would allow the combined company to save $150 million to $200 million during the first year alone, and Musk said he thinks that estimate is conservative.

In addition to the cost savings, Tesla also said combining the two companies would reduce hardware, manufacturing and installation expenses, while also lowering the cost of finding new customers – something that has been a stubbornly expensive problem for SolarCity.

If Musk is right, the merger could solidify the financial foundations of both companies at a time when SolarCity is gearing up to open the biggest solar panel factory in the Western Hemisphere next year in South Buffalo as part of the state’s Buffalo Billion economic development initiative.

Those cost savings also are important because the merger combines two money-losing companies that also burn through hundreds of millions in cash each year.

Tesla, which is getting ready to ramp up production of its more affordable Model 3 electric vehicle and preparing to open its battery “gigafactory” in Nevada, already is facing huge operational challenges as it scales up its operations. And so is SolarCity, as it branches out into manufacturing on its own grand scale at the Buffalo factory.

The agreement also comes at a time when SolarCity continues to struggle to meet its own scaled-back growth forecasts. The company on Monday said it would once again miss its solar panel installation target for this year. SolarCity also has regularly disappointed investors by falling short of its installation targets in recent quarters.

SolarCity, the nation’s biggest residential solar installer, said it now expects to install enough solar panels to generate between 900 megawatts and 1,000 megawatts of electricity, down about 10 percent from its previous forecast of 1,000 megawatts to 1,100 megawatts, and less than the 1,250 megawatts it originally forecast before sharply curtailing its growth plans last fall.

The company said it hopes next year will be better, mainly because of two new products that it plans to release during the second half of this year. One is a new offering that integrates solar panels with batteries that can store the energy the modules produce, and the other is “a new solar product focused on the five million new roofs installed each year in the U.S.”

The softness came from SolarCity’s main market. The company is the nation’s biggest installer of residential rooftop solar systems, accounting for about one of every three solar arrays that are installed on homes across the country.

“It may suggest the health of SolarCity’s near-term business may be challenged,” said Philip Shen, a Roth Capital Partners analyst, in a report.

Neither the reduced purchase price nor the scaled-back installation forecast pleased SolarCity’s investors. The company’s stock fell by 7 percent, or $1.98, to $24.72, reversing a steady rebound in its share price since the preliminary deal was first disclosed. Tesla shares fell by 2 percent, or $4.78, to $230.01.

The deal, first proposed in June, would combine the nation’s leading installer of residential rooftop solar energy systems with the world’s biggest manufacturer of electric vehicles – all part of Musk’s long-term plan to create “the world’s only vertically integrated sustainable energy company.”

The deal also would combine two companies that already are closely intertwined, which has raised concerns among some analysts and investors. Musk owns more than 20 percent of the stock in both companies. He is chairman of SolarCity and CEO of Tesla. Musk’s cousin, Lyndon Rive, is SolarCity’s CEO.

Musk has recused himself from voting on the deal, which must be approved by a majority of “disinterested shareholders” who don’t have strong business or family ties to Musk.

Musk said those concerns about potential conflicts were misguided. In fact, he said, the bigger disadvantage of being so closely entwined is that it makes it difficult to strike a fair deal between SolarCity and Tesla for batteries and systems that would store the power generated by solar panels until it is needed at night or when it’s cloudy.

“The conflicts of interest are if we don’t merge,” Musk said. “The whole point of the merger is to get rid of the conflicts of interest.”

SolarCity shareholders will receive 0.11 shares of Tesla stock for every SolarCity share they own – slightly less than the 0.122 to 0.131 shares that Tesla offered in its preliminary bid for the company in June.

The latest offer would be worth $25.37 per SolarCity share. Tesla said in June that it expected its bid to be worth $26.50 to $28.50 per share.

The agreement also gives SolarCity a 45-day window to “go-shop,” which essentially would allow the solar energy systems installer to seek out other purchase offers through Sept. 14.

But Edwin Mok, a Needham & Co. analyst, said in a research note that he thinks shareholders from both companies will approve the deal.

Tesla said it expects the deal to close during the fourth quarter of this year, assuming SolarCity doesn’t get a better offer and shareholders of both companies vote to approve the merger. The deal also must be approved by regulators.


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