Driving Synergies

Tesla’s acquisition of SolarCity to create largest sustainable energy company

The past year has seen a number of mergers and acquisitions (M&A) in the sector as well as improvisations in the long-term strategies of the key players. One of the most talked-about M&As is the recent acquisition of the US-based solar energy service provider, SolarCity, by the US-based automaker and energy storage company, Tesla Motors. This combined entity aims to become one of the largest sustainable energy companies in the world.

Tesla was founded in 2003 by a group of engineers in Silicon Valley, who wanted to prove that electric cars could be better than gasoline-powered cars. The key objective was to expedite the move from a mine-and-burn hydrocarbon economy towards a solar electric economy, as noted by Elon Musk, chief executive officer and co-founder, Tesla. To this end, the company had in the past launched electric vehicles and lithium-ion battery products such as Powerwall and Powerpack. While this gave customers access to clean energy cars and battery packs that consumed energy more efficiently, the products still did not have access to a clean energy source. In this context, the acquisition of SolarCity was a logical next step in forming an integrated sustainable energy company, spanning energy generation storage and transportation.

Acquisition details

On June 21, 2016, Tesla made an offer to acquire SolarCity. This included acquiring all the outstanding shares of the common stock of SolarCity in exchange for Tesla common shares. It proposed an exchange ratio of 0.122 to 0.131 shares of Tesla common stock for each share of SolarCity common stock, representing a value of $26.50 to $28.50 per share.

The acquisition was approved by the shareholders of both companies on November 17, 2016. Excluding the votes of Musk, who owns 21 per cent of Tesla and 22 per cent of SolarCity, and other affiliated shareholders, over 85 per cent of the votes cast were in favour of the acquisition. With the deal valued at about $2.6 billion, it is expected that SolarCity will add over half a billion dollars of cash to Tesla’s balance sheet over the next three years and more than $1 billion in revenue in 2017.

Joint synergies

Given their similar vision – of a world powered by sustainable energy – the Tesla-SolarCity deal provides many advantages. Known for its experience in design, engineering and manufacturing, Tesla can help in advancing solar panel technology. The existing Tesla stores could also provide more visibility to SolarCity’s products. On its part, SolarCity’s installation expertise and wide network of sales and distribution channels could help in improving the installation of Powerwalls and charging systems for Tesla vehicles.

Industry opinion

The transaction has been widely viewed as a bailout for SolarCity. This is on account of Tesla acquiring over $3 billion of SolarCity’s debt, whose shares had plummeted more than 50 per cent since early 2016. Critics argue that the deal will drain Tesla’s finances and hamper the speed of production of Model 3. They also doubt whether there is enough synergy between the electric carmaker and the solar energy company to justify the acquisition. The deal drew mixed reviews by proxy advisory firms, with Institutional Shareholder Services referring to it as a “necessary step” and Glass Lewis & Co. rejecting it as a “thinly veiled bailout” plan.

Post-merger Tesla

The deal, which sparked controversy over debt and corporate-governance concerns, is a win for Musk’s vision of Tesla as an integrated clean energy company. In line with his vision for the combined companies, Musk, on October 28, unveiled a new product, Solar Roofs. While these look like normal roofs, Solar Roofs utilise aesthetically pleasing shingles that contain solar cells. With this product, the combined entity is aiming to disrupt the solar rooftop market.

That said, an important risk that the company is faced with is the change in the US administration. President-elect Donald Trump has in the past been critical of clean energy and has showed clear intentions of rolling back various environmental regulations. This change in the political environment poses a major risk for Tesla.

It also faces the critical challenge of integrating the two companies that have a track record of fleeting profits and frequent fundraising needs. While the deal has been approved, it remains to be seen how seamlessly the two companies integrate to deliver value to customers. At a broader level, the challenge is to bring renewables into the mainstream and demonstrate that they are not only cleaner; they could also be more profitable.

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