Tesla seals US$2 billion SolarCity deal set to test Musk's vision

By Christopher Martin, Dana Hull

Tesla Motors Inc. and SolarCity Corp. shareholders approved the electric-car maker's purchase of the solar installer in a deal that's poised to test their shared Chairman Elon Musk's vision for a viable one-stop shop for clean energy consumers.

More than 85 per cent of Tesla shares voted in favor of the deal, according to a company statement, which said SolarCity shareholders also approved the acquisition. The deal, valued at about US$2 billion, integrates the maker of Model S and upcoming Model 3 sedans with the installer of rooftop solar panels.

Shareholders are signing off on Musk's plan to combine and more efficiently run two companies that have a track record for fleeting profits and frequent fundraising needs. Tesla has lost about US$4.8b in market capitalization since its initial offer to buy SolarCity on June 21, while the latter company's value declined by about US$86 million.

Tesla has forecast SolarCity will add US$1b in revenue to the combined company next year and US$500m in cash to its balance sheet over the next three years. Joining Tesla's retail network with SolarCity's installers and consolidating the two companies' supply chains may result in an estimated US$150m in cost synergies within a year.

Musk owns 21 per cent of Tesla and 22 per cent of SolarCity, making him the largest shareholder of both companies. He and Antonio Gracias, who also serves as director at both companies, recused themselves from a board vote on the takeover July 30. The all-stock deal is worth US$20.23 per share, a premium of 2 per cent based on SolarCity's closing price Wednesday. The premium was about 35 per cent when first announced.

Tesla rose 2.6 per cent to US$188.66 at the close Thursday, while SolarCity gained 2.9 per cent to US$20.40.

The quarterly profit Tesla reported last month was the first for the Palo Alto, California-based company in eight quarters. SolarCity has recorded losses in six of the last eight quarters. The two companies have conducted five separate equity offerings since the San Mateo, California-based solar company first sold shares to the public in December 2012.

Investor Jim Chanos, whose firm Kynikos Associates Ltd. saw weakness in Enron Inc. before its collapse, has been highly critical of the merger in part because of the US$2.89 billion in SolarCity debt Tesla will be taking on.

Tesla CEO Elon Musk.
Tesla CEO Elon Musk.

While any shareholder who votes for the deal "needs to have their head examined," Chanos told Bloomberg Television in an interview Wednesday, he expected the merger would be approved.

The deal drew mixed recommendations by proxy advisory firms, with Institutional Shareholder Services giving its blessing and Glass Lewis & Co. rejecting it as a "thinly veiled bailout plan." ISS said Tesla would be able to bridge cash-burning SolarCity's funding gap and called the deal a "necessary step" in the electric-car maker's push to become an integrated sustainable energy company.

The combined company's attention will now look forward to the aftermath of America having elected Donald Trump as its next president. The real-estate mogul has vowed to relax environmental regulations and tapped Myron Ebell, a climate-change skeptic, to head of his Environmental Protection Agency transition team.

Gordon Johnson, an analyst at Axiom Capital Management Inc., downgraded seven solar companies Tuesday, citing his expectation for less favorable renewable energy policies from Trump's administration.

Musk, a South Africa-born immigrant, has come under fire from conservative activists who would like to roll back subsidies for clean energy. The advocacy group Citizens for the Republic has called for Congress to end federal subsidies for "all Elon Musk companies," including solar investment tax credits.

Fans of Musk and his vision, meanwhile, doubled down heading into Tesla and SolarCity's vote Thursday. Austen Allred, an executive at San Francisco-based startup LendUp, wrote Musk on Twitter to say he "put 100 per cent of his net worth" into Tesla, adding: "Don't even care if I lose it all. Thank you for what you're doing and have done."

"Wow, thanks," Musk wrote back Wednesday. "We won't let you down."

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