Wednesday, June 22, 2016

SolarCity/Tesla: Analysts React (SCTY; TSLA)

Not only is Tesla taking on almost $3 billion in SolarCity debt, it is also buying into the problem of even more negative cash flows, both Operating and FreeCashFlow.

Which of course, along with the corp. governance nastiness, explains why Tesla has lost almost 11% of its market cap, amounting to $3.14 billion on the 133 million shares out and more than the entire market cap for SCTY (98,296,422 shares at $22.30, up 5.2%).

The market is saying SCTY is worth less than zero to Tesla.

We'll have a lot more to say about this in the coming days.
In the meantime here's hoping the stock closes down $23.454 on the day so I can make humble pi jokes.

From MoneyBeat:
Elon Musk is shuffling his chips again.

Mr. Musk’s Tesla Motors on Tuesday made an acquisition offer to, well, to Mr. Musk’s SolarCity The two companies count Mr. Musk as both chairman and their largest shareholder. The idea is to have one company, with one brand name, producing electric cars, batteries, and solar panels. It would also make Tesla an even more complicated company, and add an unprofitable operation to its already-strained finances.

Here’s what the Street had to say:

Colin Langan, UBS (Rates Tesla sell, SolarCity neutral) We are cautious on the deal as synergies seem limited, it adds complexity, and most importantly it could potentially be an unneeded distraction for Tesla management.

Tesla already is facing aggressive Model 3 production targets of 500,000 by 2018 and the production ramp of the Model X has been slow. Adding SolarCity may increase the operational and accounting complexity as the business is very different from auto and storage. Although SolarCity would only be ~10% of combined Tesla-SolarCity sales, SolarCity’s GAAP losses could be a significant drag. SolarCity would continue to require at least upfront upfront capital investment to grow its business, likely increasing overall cash burn for Tesla.

SolarCity and Tesla have worked together on a battery offering, and there may be some potential future synergies on the SG&A front, but we note Elon Musk was unaware of how many Tesla customers have solar – implying customer acquisition synergies may not be the primary focus.

Pavel Molchanov, Raymond James (strong buy rating on SolarCity) The key word, of course, is “proposal.” This is not a done deal, and we are skeptical that the initial terms will prove acceptable to SolarCity’s board. Put simply, we think there is a deal to be made here, but at a higher price point.

Historically, the stock has traded at more than two times and even three times [net present value], and while that is probably not realistic for the foreseeable future, a takeout multiple of (at best) 1.35x NPV does not look very appealing. Because this stock is (as always) a special situation, there is no objective way to gauge what is the right multiple, but we think that a $30+ deal value would be more appealing, both “optically” and fundamentally.

Sven Eenmaa, Stifel (downgraded SolarCity to hold from buy) Reward to risk looks balanced on proposed acquisition price. The proposed acquisition price is 26%-36% above SCTY’s 7/21 closing price, but is at the range midpoint only marginally above SCTY’s 2016 YTD average closing price of $26.95. Nevertheless we would expect Tesla’s proposal to set the baseline for SolarCity’s acquisition valuation, particularly given Elon Musk’s 22% ownership and role at SolarCity, and given recent risk perceptions around SolarCity’s growth and financing strategy execution, which would benefit from increased backing from a company such as Tesla. With Tesla’s proposal pointing to an intent to negotiate and complete the combination in an expedited manner, and given the complexity of and recent execution challenges at SolarCity, we see very limited potential for competing bidders to emerge....