Tesla Wants To Be Your New Utility Provider

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.

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.

Trip Chowdhry, Global Equities Research Your new utility provider: 500,000 Tesla Model 3 will hit the road every year starting 2018 – the current electric grid does not have the capacity to cater to this enhanced load that would start to happen; Starting 2018, almost every household may be Tesla customer, with either a Tesla car, Tesla battery or Tesla solar generation or any combination of these, or all of them; Next, we expect Tesla to do something in the grid as well.

Sophie Karp, Guggenheim (buy on SolarCity) We think that the offer for SolarCity is low, considering its vast and valuable customer network (which can be used by Tesla to cross-sell its own products and services) as well as SolarCity's portfolio of assets and development capabilities.

We value SolarCity's portfolio of deployed assets at the end of the second-quarter 2016 at $24/share (net of recourse debt). Additionally, we value SolarCity's development business at $12/share. Effectively, Tesla would be paying $2.50-4.50/share for the DevCo—well below our estimates. As a reminder, our DevCo valuation presumes that SolarCity is able to generate $0.53-0.63/w in cash margin in the normalized scenario, which is consistent with recent monetization deals and 2015 run-rate of costs. To get to the middle of the valuation range of $3.50/share, we would need to assume $0.37-0.40/w margin instead, which, if validated by a market transaction, we would view as a negative cross-read to other residential peers.

Brian A. Johnson, Barclays (underweight both companies) While no doubt the Tesla bulls will hail the combination as visionary, we believe the assumption of another $2.6 billion of debt to fold in a solar company with limited synergies and uncertain growth/cash prospects only reinforces our negative view of Tesla (UW, PT $165). For SolarCity (UW, PT $20), it is a timely lifeline.

Given limited access to capital for SolarCity, we believe the core rationale for this deal is for SolarCity to take advantage of Tesla's relatively favorable access to and cost of capital. However, the combined entity is likely to magnify the losses and cash burn that both were seeing individually.

In funding SolarCity's losses, it further reinforces our view Tesla will need to return to the capital markets for additional capital infusions, likely via the equity markets. However, this is contingent on the equity capital market remaining an open well for Tesla – which is far from certain.

Source: Tesla Wants To Be Your New Utility Provider