Solar power dynamo Solar City (ticker: SCTY) said Monday that it agreed to be purchased by electric car pioneer Tesla Motors (TSLA), but the price of the transaction is disappointing Wall Street and sending shares of both companies lower.
Tesla is buying Solar City for $2.6 billion in an all-stock deal. Shares of SolarCity fell nearly 5 percent on the news, as the price tag was about $300 million less than Tesla offered in June.
[See: 5 Stocks Wall Street Is Watching This Week: PFE TSLA SQ FIT BRK.B.]
TSLA stock initially fell slightly on the news, briefly losing as much as 2 percent.
The buyout is an important part of Tesla CEO Elon Musk’s grand vision to create the world’s preeminent diversified sustainable energy company. Viewed for years as a high-tech auto company, Tesla pivoted into energy storage with its Powerwall batteries, which were released in 2015. The packs work with SolarCity’s panels to store excess power generated during the daytime for consumption later, allowing customers to wean themselves off the grid.
Musk figures there will be major synergies from the merger — the news release announcing the deal estimates “cost efficiencies” of at least $150 million in the first year after the deal closes. The SCTY-TSLA tie-up is expected to close in the fourth quarter, and is still contingent upon shareholder approval by both companies.
SolarCity has until Sept. 14 to field other offers from potential suitors, but no other serious bidders are expected to come out of the woodworks.
Musk himself is the largest single shareholder in both SolarCity and Tesla; he’s recused himself from the approval process and will not vote his shares of either TSLA or SCTY for the clear conflict of interest.
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That may be one reason the offer price was lowered, as Wall Street sold off TSLA stock to the tune of 10 percent when the plan was first announced back in June.
SCTY shareholders will receive 0.11 shares of TSLA for each share of SolarCity they own, putting the buyout price at $25.37 per share, below the range of $26.50 to $28.50 per share Tesla originally offered.
Another possible reason for the price reduction: This morning, SolarCity lowered its 2016 guidance for megawatts installed, an important measure of the company’s growth. SCTY is now guiding for between 900 and 1,000 MW installed on the year, lower than the 1,000 to 1,100 it previously guided for.
The decision to finance the deal entirely with TSLA stock could be a savvy one for Tesla, as its shares currently trade for 80 times forward earnings. Using overvalued stock for acquisitions is arguably better than using cash, since it doesn’t hurt liquidity and also minimizes the dilution that will take place from putting more TSLA stock on the market.
[Read: Why Stock Buybacks Are Often a Lousy Idea.]
Whether the deal will prove to be in the best long-term interests of Tesla shareholders is very much an open question, as neither Tesla nor SolarCity is profitable, and both are loaded up with debt. If anyone can make this work it’s Elon Musk — but in the meantime, Wall Street’s still right to be skeptical.
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Tesla (TSLA), SolarCity (SCTY) Stumble on $2.6 Billion Buyout originally appeared on usnews.com
