The biggest headline today was the one trumpeting Tesla's (NASDAQ:TSLA) proposed acquisition of Solar City (SCTY). Unfortunately for Elon Musk, the headline was met with varying degrees of derision and scorn.
There have been numerous articles written today about why Tesla shouldn't be buying Solar City. The most common concerns expressed in these articles are the following.
1. There are ZERO synergies between the companies
2. Solar City's business model is cracking
3. Elon Musk is too conflicted and pushing this deal to save his own assets
I have to say that I agree wholeheartedly with those statements. However, I will not be writing another article about why this merger stinks. Au contraire, I think it is so stinky that it won't happen. And, as a result of this, Solar City stock is going to go down.
Wall Street is disgusted
In order for this acquisition to transpire, it must be approved by both parties; this is not usually the case in an acquisition, mores o in a merger. However, due to the complicated crossholdings present in this transaction, the board of Tesla has volunteered to put this to a vote of their shareholders as well as those at SCTY.
The terms of the acquisition also state that Musk will abstain from voting his shares. This takes the single largest shareholder, and greatest proponent of the transaction, out of the picture.
So, it's up to the current, disinterested (their word, not mine) Tesla shareholders to pass this acquisition. The term "disinterested" is interesting...they may not have intertwined holdings like Musk does, however they are certainly interested in the outcome. And, Tesla is very much a cult (read overpriced) stock with a very loud and vocal core following. My gut tells me that the current shareholders of TSLA invested in the company for many reasons; none of which are that they are in the solar business.
Indeed, maybe the biggest reason that TSLA has such a cult following and so high a valuation is Musk himself. He is a visionary hero to many people. However, his financial maneuvering seems to have put him at some risk in these stocks. And, the intermingling of all his companies has gotten increasingly disconcerting; the largest lender to Solar City is SpaceX???
I believe that, much like the Wizard of Oz, Musk has exposed himself. He is certainly putting his own interests before those of other shareholders in this merger. And, in doing so, I think the bloom is off the rose. "Pay no attention to the man behind the curtain!" Yeah, right...this deal is a dagger to the wallet of his followers.
The share price movement today reflects the disappointment of the TSLA shareholders, and the analysts that follow the stock. This acquisition represents less than 10% of the market cap of Tesla at full value. However, Tesla stock went down by 10% today. This shows that the investors feel that the value of this acquisition is actually NEGATIVE to Tesla. Ouch.
Based on this, if you were a TSLA shareholder, one of the true believers in the company, would you vote for the merger to take place? A yes vote cobbles together two companies that are both hemorrhaging cash and that the market believes has negative value to investors when combined, while a no vote would keep the Tesla story intact for its cult followers and actually cause a rally in the stock. Seems like a no-brainer to me.
Both businesses are cash hogs
I won't spend a lot of time discussing the business models present here as there are many Seeking Alpha authors who have done so with great clarity. The truth is, however, that both companies are losing money. Lots of money.
The issue here is that both companies need to garner additional investment dollars. And, here's where it gets tricky. Solar City is a risk for investors in that the regulatory climate for solar reimbursement is changing. Their business model, of basically building a disparate solar power plant each year, is greatly at risk.
Meanwhile, Tesla has announced big plans to roll out their next car to the masses. This rollout is going to cost lots of money and has been viewed by many investors as an unreachable target. Musk has done a great job of building a wonderful car (in the Model S), but he has yet to demonstrate the ability to scale up production or to make any money building cars. There is risk to that ever happening.
Bottom line? Investors have enough to worry about with either company before they write a check to fund it. Combined, they will be coming to the market frequently and in big size with a convoluted story. "Uh, we need a billion dollars to build a car facility and a billion to stick solar on your neighbors' roofs. And, we'll need that again in six months. Any takers?"
The deal will fall apart and Solar City stock will go down
I believe as long as this merger is on the table, the shares of both companies will go lower. Investors don't want to buy into this merged company and they are going to vote with their shares by selling. It happened on day one of the merger and is happening again on day two.
Looking forward a couple months, I foresee a few likely possibilities. First, I think there will be lawsuits. Big ones, attacking Musk for pushing this merger through. It's inevitable.
Secondly, I believe that shareholders of TSLA will look at their diminished share price and believe that it is simply due to the merger. If they vote against the merger, the stock should go back to well over $200, right? They will band together as a group to fight this deal and I believe the boards of the companies will be forced to listen to them and call it off.
When that happens, expect Solar City shares to decline from whatever level they are at (which will likely be lower by then). They have to be disappointed now. SCTY investors think they are funding clean energy, not building cars. They also are (were?) believers in Musk. They have just been told that SCTY stock is not going back to its old highs (unless Tesla goes to $400). Their upside is capped by this merger to being only as great as the combined entity can go. Meanwhile, the merger looks like a panic move by Musk and who wants to own a stock in which the founder, and largest shareholder, has just delivered a resounding vote of no confidence?
Thus, I feel that SCTY is a short here. I think there is very little chance of the shares rallying during the merger. More likely, both stocks go lower while investors contemplate this. And, if it gets called off, SCTY should gap down. I would be short SCTY for the next couple months.
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.