Yesterday afternoon, Elon Musk announced that Tesla, a company he co-founded and currently runs, was offering to buy Solar City, another company he founded, and where he is currently chairman of the board. In a conference call with investors this morning, Musk rationalized the roughly $2.86 billion purchase like this: "When we’re selling someone the Powerwall very often, if not almost always, they are curious about solar," Musk said. "So then not being able to sell them solar directly at Tesla stores is quite inefficient. As you look ahead to [selling] the Model 3, a $35,000 car, well that same person at the same moment we could sell them roughly an equivalent value of solar panels and a Powerwall, effectively doubling the sale at that time, and then putting it all in at the same time."
This is why Musk sees Tesla buying SolarCity as "common sense/blindingly obvious." In his mind, the two companies’ customer bases overlap. People who want the Model 3, Tesla’s first mass-market electric vehicle, would presumably also want to trick out their homes with solar panels to charge the car’s battery, thus creating a totally green, totally sustainable feedback loop of self-righteousness. Customers strolling through Tesla’s gleaming showrooms will soon be able to browse the solar options while deciding whether to get Autopilot installed in their Model 3.
"NOT BEING ABLE TO SELL THEM SOLAR DIRECTLY AT TESLA STORES IS QUITE INEFFICIENT"
But the acquisition could be incredibly dangerous for Tesla, and Musk himself. It’s a long-term investment with no real short-term payoff, and both Tesla and SolarCity will need a lot of cash to stay operational until this deal starts to bear fruit.
Just look at the numbers: Musk is the largest owner of SolarCity’s "solar bonds" after his other company, SpaceX, purchased $90 million of a total $105 million sold last March, according to The Wall Street Journal. SolarCity has more than $6 billion in liabilities, half of which is debt. A research note released by Goldman Sachs just minutes before the news of the deal broke called SolarCity "the worst positioned name" in the residential solar industry. Musk has used both his personal fortune and Tesla shares to help secure this debt.
Wall Street was quick to pounce, with several analysts expressing "skepticism" that the deal was the best use of Tesla’s capital. "The rationale for this purchase, supposed to create an integrated clean energy company, seems somewhat tenuous to us," said Emmanuel Rosner, analyst at CLSA. Colin Langan from UBS speculated the deal could be an "unneeded distraction" for Tesla’s management, especially as it ramps up production for the release of the Model 3 in 2017. Gordon Johnson from Axiom Capital Management said bluntly that the announcement "suggests SolarCity has very little value."
And both companies burn through cash like they print it themselves. As noted by The Wall Street Journal’s Heard on the Street column, Tesla torches 50 cents for every dollar in sales, while SolarCity burns nearly $6 for every dollar in sales. The columnists called the merger of two cash-hungry businesses a "hairbrained scheme."
Market experts were surprised by the level of skepticism leveled at the deal.
