Tesla And SolarCity: 3 Interesting Facts

| About: Tesla Motors (TSLA)

Summary

Elon Musk recused himself from voting on either side of the deal, but the deal will still go through.

Tesla's equity decreased more in value than the equity value proposed for SolarCity.

The news was announced in an interesting and unusual way.

The news is well-covered so I will focus on a few incremental thoughts that are getting lost in the noise:

1. Elon Musk recused himself from voting but the deal will go through nonetheless

As of March 31, 2016, major holders of Tesla (NASDAQ:TSLA) included:

  1. Fidelity who owns 10.2%
  2. Baillie Gifford and Company who owns 8.2%
  3. T. Rowe who owns 6.0%

So excluding Elon Musk's 27% ownership, the three investors above own one-third of the remaining outstanding shares. Given that these three institutions have sided with Elon Musk for some time, I would be surprised if they did not support him in his decision to combine the two companies. Fidelity even got a personal shout-out from Elon Musk during the company's last annual shareholder meeting.

SolarCity's (NASDAQ:SCTY) ownership is similarly concentrated, but the shareholders on that end are probably very happy with this deal anyway.

2. Tesla dropped more than the value offered for SolarCity

This is very interesting. Soon after the deal was announced after markets closed, Tesla's equity value dropped more than 12%, which amounted to ~$4 billion just before the announcement. SolarCity's total equity, however, was valued at more than $2 billion before the markets closed. Since the deal was structured as a stock swap, this effectively means that the market believes that the deal destructs equity value, to the tune of $2 billion! In other words, the market is valuing SolarCity's equity at negative $2 billion under Tesla.

Given that SolarCity's equity was valued at positive $2 billion just before the announcement, this does not make much sense. Maybe the players who are driving down Tesla's stock price are aware of an issue the rest of the market missed... This will be interesting to watch, but maybe we will never find out.

3. The deal was announced in an interesting way

I am surprised that the deal was announced before SolarCity's board approved it. In that case, the deal announcement would read something like this:

SolarCity has agreed to be acquired by Tesla

Or

Tesla and SolarCity announced they have entered into a definitive agreement under which Tesla will acquire SolarCity

But instead we got the news of a proposed offer still subject to approval from SolarCity's board. I find this very interesting. My guess is that both sides wanted to test the reaction and leave open the door to drop the deal, in case stuff hits the fan.

Long-term implications

Before the deal announcement, SolarCity was heavily shorted due to the perceived financial troubles well advertised by the prominent short Jim Chanos. Tesla is effectively acquiring these doubts about SolarCity's financial state. I would not be surprised if Jim Chanos increases his short position on Tesla some time this week.

Maybe more importantly, this deal has the potential to dramatically increase the complexity of Tesla's financial statements, which already take heat due to non-GAAP adjustments. Have you ever tried to read through a SolarCity presentation? This fact alone can scare off some Tesla shareholders.

Finally, both companies currently burn cash at a high rate to make very long-term investments. The combined company will no doubt need to raise capital, whether through stock issuance or more debt, but it is not clear at this time whether or not the existing Tesla shareholders will be willing to put up more capital.

Bottom Line: The deal will go through, and no matter what the clickbait articles, the haters that will appear in the comments to this article, or your retired uncle who dabbles in stocks think, only time will show if this was a good deal or not. Just remember, do you really want to bet against Elon Musk?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.