I am assuming that SolarCity (NASDAQ: SCTY) shareholders will jump at the chance to have Tesla (NASDAQ: TSLA) buy the company. When you look at SolarCity's negative cash flows and potential issues raising capital to fund its growth even though its shares are down 58% this year and 75% from its all-time high of $86.14 it would surprise me to see them vote no.
The challenge will be getting enough Tesla shares to approve the merger since Elon Musk, who owns 31,100,644 million or 23.2% of the outstanding shares, and Antonio Gracias, who owns 411,422 shares or 0.3%, will not be voting since they are on SolarCity's Board. When you remove Musk's and Gracias' shares there are 102,345,618 shares that can be voted on the merger.
To get to 50% of the 133.86 million total outstanding shares 66.928 million will have to vote in favor of it. That is 65.4% of the shares that can vote.
There is some support for the deal
From a Reuter's article there are quotes from a current shareholder and thoughts from two Fidelity portfolio managers who support the merger. "It's a natural evolution of their mission to transform transportation into a sustainable business," said Joe Dennison, a portfolio manager of Zevenbergen Capital Investments, which has about 600,000 Tesla shares, or about 0.4 percent of shares outstanding.
The manager of the second largest mutual fund investor in Tesla, the $12 billion Fidelity OTC Portfolio, which is also the largest institutional holder of SolarCity, praised a tie-up in comments earlier this year. "We remain fans not just of Tesla products, but of the concepts and potential future partnerships behind the company. We foresee fruitful synergies between say, Tesla and SolarCity - or any company that can benefit from superior battery technology," Gavin Baker, who runs the Fidelity OTC fund, said in his first-quarter commentary for investors. It owns 2.1 percent of shares.
Baker and Will Danoff, who runs the $100 billion-plus Fidelity Contrafund, the largest mutual fund investor in Tesla with 3.5 percent of stock, have both told Reuters in interviews that they tend to give more leeway to founder-run companies which they believe are still in the early stages of growth.
Overall I find the company's reasoning long on spin and short on substance.
A big swing vote from an unknown investment firm
However it could be Baillie Gifford, one of the United Kingdom's largest independent active investment firms, that controls the merger's fate. Baillie Gifford was founded in 1908 in Edinburgh and manages 123 billion pounds ($191 billion). As of March 31 it owned 11.929 million Tesla shares or 11.66% of the shares voting on the merger.
If it agrees to the merger Tesla will need 55 million votes out of the remaining 90.4 million shares or 60.8%. While the company will still need more than 50% of the rest of the shares having Baillie Gifford vote yes could sway others.
If it does not agree Tesla could have a very tough time getting approval since it will need 74% of the remaining shares to agree (66.928 million divided by 90.4 million shares).
After Baillie Gifford T. Rowe Price owned 7.37 million shares or 7.2% of the shares that could vote and The Bank Of Montreal had 4.56 million shares or 4.5% of the voting shares. Tesla needs these firms to agree also otherwise it is highly unlikely the merger will come to fruition. Even if these three firms do not "control" the voting of the shares they could have an outsized influence on the outcome.
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