SolarCity: Get Out

| About: Tesla, Inc. (TSLA)
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Summary

Tesla Motors makes a surprise proposal to purchase SolarCity.

The move causes Tesla's stock to collapse limiting any benefits to SolarCity shareholders and offers limited incentives to close the deal.

This deal isn't a reason to own SolarCity and if anything offers an opportunity to exit a losing position.

After the close, Tesla Motors (NASDAQ:TSLA) disclosed via a blog post the shocking news that the company was proposing a buyout of SolarCity (SCTY). The companies were always linked due to the connection to Elon Musk, but the business models were too dissimilar for any business combination. Or so the thinking went as Solar City plunged to new lows this year.

Source: SolarCity website

The deal involves the electric vehicle manufacturer offering 0.122 to 0.131 shares for each share of SolarCity. Tesla suggests the deal offers a value of $26.50 to $28.50 per share for SolarCity offering a premium of 21% to 30% over the closing price of the stock on Tuesday.

Despite the claimed premium, the deal has several big flaws that SolarCity shareholders will surely balk at. The primary issue being the after hours action of Tesla stock. The stock closed down over 12% to close at $192.75. At the after hours closing price, the deal only offers a value of $25.25, if one assumes the higher exchange ratio of 0.131 shares.

If the currency used in the offer loses value, than SolarCity shareholders won't benefit. Considering the general reaction of analysts and investors was negative with claims of "distracting" and "defies common sense", SolarCity shareholders aren't going to see much upside on a premium offer that is almost gone already.

The secondary issue is that SolarCity shareholders are exchanging a currency that trades near the lows for the Tesla shares that trades near the highs. SolarCity is down nearly 70% over the last two years so the small premium offer is only a small consolation prize.

SCTY Chart

SCTY data by YCharts

The deal is even more confounded by the $32 billion value of Tesla Motors on the close and the minimal value of SolarCity. Anybody owning the stock for the rebound potential and the growth of solar now basically owns a manufacturer of premium EVs calling itself a vertically integrated energy company focused on clean energy.

Basically investors that accepted the risk on the downside will have no potential to gain on any upside in solar. Even if the integration works, anybody wanting to invest in a producer of EVs could've bought the Tesla stock outright.

What the move does is distract the management team and the investor base from an already daunting task of ramping up vehicle production and battery production at the recently opened Giga factory. All the while distracting investors with the complexities of solar panel installation and financing.

The income statements will be massively confusing with SolarCity on pace to report an EPS loss approaching $10 over each of the next two years. A company leasing solar panels for 20 years is a completely different model than trying to sell cars for an immediate profit. Sure the clean energy concepts have some similarities, but a partnership would resolve the integration solutions that Tesla promotes as a prime reason for consuming the deal.

The key investor takeaway is that Tesla might get the deal done due to the ownership position of Elon Musk that Edgar lists as 31.1 million share for Tesla and 21.8 million shares for SolarCity. Though Elon and his first cousin CEO of SolarCity plan to recuse from voting on the deal, the believers might follow his arguments on the value of the transaction though the company failed to provide any tangible benefits.

The question though is why a SolarCity investor would want to accept this deal. Obtaining a currency in Tesla shares surely destined to decline under this deal and obtaining the shares much closer to the yearly highs very much limits the upside potential.

Shareholders should take any upside the market presents on Wednesday and run backing up my previous bearish recommendation. For those bullish on the business prospects of SolarCity, plan to vote down the deal and require Tesla to pay a more appropriate price.

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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.