Tesla makes offer to buy SolarCity

Dive Brief:

  • Tesla Motors has made an offer to acquire SolarCity, the company announced in a blog post today. Under the terms of the deal, Tesla would acquire all of SolarCity's outstanding shares of common stock.
  • Tesla has proposed an exchange of 0.122-0.131 shares of Tesla stock for every share of SolarCity stock. The deal value would be around $2.5-$3 billion, depending on the final price of the shares. That represents a value of $26.50-$28.50 per share of SolarCity stock, or a 21%-30% over the closing price ($21.19) of SolarCity's shares today. 
  • SolarCity's board of directors has yet to vote on the deal. Elon Musk, who sits on both Tesla and SolarCity's board of directors, has recused himself from both votes. (Antonio Gracias, who also sits on both boards, has done the same.)

Dive Insight:

If it goes through, the deal would create a vertically-integrated clean energy company offering a range of products from electric vehicles to battery storage and rooftop solar. Wall St. reactions to news of the deal were mixed: SolarCity's stock shot up to roughly $26 in after-hours trading on news of the deal, while Tesla stock plummeted from $219.61 at Tuesday's close to roughly $195 in after-hours trading. 

On a press call announcing the deal, Tesla Chairman and CEO Elon Musk said the deal essentially "will only move forward if there is a majority vote of the non-me shareholders in both companies." 

The Tesla-SolarCity deal is something that the companies have been thinking about for many years, Musk said. The timing is right now because Tesla is wrapping up its activities with energy storage and SolarCity has a number of different products coming out. From a product integration standpoint and offering the most compelling experience to consumers, the companies need to achieve a consolidation of the products, Musk added. 

"It's an obvious thing to do," he said. "The question was timing."

But the move also comes at a time when SolarCity has struggled financially and its stock price has slid from about $57 to $21 over the last six months. After the company reported disappointing earnings in the last quarter, as well as a weaker-than-expected financial forecast and sluggish installation growth, Elon Musk acquired $10 million worth of SolarCity shares in early February. Musk, the largest shareholder in both Tesla and SolarCity, has made a habit of buying the companies' shares when they are in need of capital.  

If the deal goes through, Musk expects SolarCity would come under the Tesla brand, which would then have three product categories: cars, batteries, and solar panels. The combined company would focus on both residential and utility-scale applications. 

Tesla's potential combination platter of electric vehicles, rooftop solar, and battery storage could be an attractive alternative for consumers looking to reduce their environmental footprints and their dependence on the power grid. Despite solar and storage not being everyday products for the average consumer, Tesla and SolarCity have name-brand recognition, thanks to the star power of Elon Musk. And if the deal goes through, SolarCity would gain a new retail channel: Tesla stores. 

Here’s how it would work, according to Musk: “You’d walk into the Tesla store and say: ‘I’d like a great solar solution with a battery and an electric car.’ And in 5 minutes you’re done. It’s completely painless, seamless, easy and that’s what the customer wants.”

“Certainly the vast majority of Powerwall customers are interested in solar," JB Straubel, Tesla's CTO, said. "There’s a great overlap.”

But while Tesla and SolarCity represent disruptive threats to the electric utility industry through their residential products, both companies have made efforts in recent times to make peace with utilities and even offer them products and services, such as Tesla's utility-scale Powerpack battery announced last year and SolarCity's distributed energy resource (DER) aggregation offering announced this year.

"I think we’ll likely see quite a lot of partnerships with utilities, and we see our business [with them] growing quite significantly. When you combine solar plus storage you can deliver a tremendous amount of grid services," Straubel said on the call. "That’s something I think we see a big future in, in any case. It’s a good business model and I don’t think that’s going to change."

Solar-plus-storage brings significant opportunities to utilities and residential customers with rooftop solar arrays. For utilities, solar-plus-storage could lead to massive load and customer defection, but it could also lead to lower system-wide costs if the resources are aggregated on a grid-scale, a service that SolarCity recently said it would offer to utilitiesTesla and SolarCity already have a partnership to provide storage services to dispatch utility-scale solar energy at night during peak load times in Hawaii. 

All in all, Musk believes the future is bright for utilities, something he emphasized at last year's annual meeting of the Edison Electric InstituteAs consumers transition from petroleum-fueled vehicles to electric ones, Musk predicts that electricity demand will double or more, creating a huge new market for utility services. In the long run, Musk believes distributed generation will account for about a third of electricity generation, which means there will still be a strong need for central station power and the grid. 

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