Is it a bailout?
Elon Musk might call the merger between his energy company SolarCity and electric car maker, Tesla Motors a “no-brainer,” but most of Wall Street seems to disagree.
On the other end of the spectrum, far, far away from Musk, famed short seller Jim Chanos called the move a “brazen Tesla bailout of SolarCity” and a “shameful example of corporate governance at its worst” on CNBC. Notably, Chanos has had short positions—meaning he is betting the shares of the company will fall—in both Tesla and SolarCity.
And some analysts are noting that the deal seems to have more benefits for SolarCity than Tesla—an opinion reflected in the two companies’ stock price. The former rose more than 4%, while the latter fell nearly 9% on Wednesday.
Oppenheimer analysts led by Colin Rusch downgraded the stock to “perform,” or neutral—which on Wall Street usually means sell—following the news, saying that “investors are likely to view this transaction as a bailout for SolarCity and a distraction to Tesla’s production hurdles.”
Deutsche Bank analysts led by Rod Lache noted that yes, the two companies may fit together as an energy conglomerate, but its investors weren’t looking to invest in such a company. Deutsche Bank reiterated its “Hold” rating—again typically code word for sell—on the stock.
A team of J.P. Morgan Chase analysts covering SolarCity noted that while they are skeptical of any near-term customer, product, or technology synergies since the two companies offer different products, the cost of capital for a merged entity may be lower.
J.P. Morgan’s view that the acquisition had limited synergies was reiterated by a team of UBS analysts led by Colin Langan, which found other problems with the deal as well. Adding SolarCity to Tesla’s already teeming plate (namely the Model 3 rollout) could be an “unneeded distraction” for the company’s management, and prove to be a cash burn.
The team reiterated their “Sell” rating—which is Wall Street speak for “Sell, Sell Sell”—on the stock.
Barclays also noted that the deal would be a “lean mean cash burning machine for Tesla” and a “life-line for SolarCity.” The combined entity would most certainly need to raise more capital, likely through the capital markets. Though, that’s assuming the market remains receptive to Tesla—and that “is far from certain,” the team led by Brian Johnson wrote. Though there are benefits for SolarCity:
The team also tore down theories that Tesla and SolarCity could collaborate to create a product, saying, “not only do solar panels on cars make little sense (they’d be largely cosmetic), we think powering Tesla recharges with SolarCity panels will be tough given recharges occur at night.”
Piper Jaffray analysts led by Alexander Potter note that buying SolarCity may be a tad too ambitious. But the move could also potentially be a draw to investors by capitalizing on Musk and Tesla’s innovative image.
Yet, Credit Suisse analyst Patrick Jobin, who covers the solar industry, says that the announcement will likely force SolarCity shorts to cover. Jobin however also notes that he remains skeptical that such a deal will go through.