Is Elon Musk Scamming Tesla Investors by Buying SolarCity?

I thought Microsoft (MSFT) buying LinkedIn (LNKD) for $26 billion was probably the worst acquisition that was going to happen this month. But, I stand corrected. Yesterday, it was disclosed that Tesla (TSLA) has made an offer to buy SolarCity (SCTY).

Tesla proposes an exchange ratio of 0.122 to 0.131 shares of Tesla common stock for each share of SolarCity, which signifies a value of $26.50 to $28.50 per share, or a 21% premium over yesterday’s closing price.

Why the deal is terrible for Tesla investors

I have said it time and again in the past that SolarCity’s business model is unsustainable.
SolarCity loses millions of dollars every quarter and has towering debt levels. In fact, SolarCity’s debt is so high, that its interest expenses are almost equal to its gross profit.

Make no mistake, Tesla is no different than SolarCity. Like SolarCity, Tesla also burns through money and this acquisition is certainly bad news for Tesla longs. Tesla recently diluted shares to fund the production of Model 3. However, with this acquisition now in the picture, the chances of another dilution in the future are very high.

Tesla has over $3.4 billion in debt as opposed to cash of $1.44 billion. While the deal doesn’t involve any cash, it will certainly destroy value for Tesla shareholders. In fact, shares of Tesla are down 10% in AH trading, equating to a market cap reduction of $3 billion. On the contrary, SolarCity’s shares are up 20%+, equating to a capitalization gain of roughly $400 million.

Evidently, the market values this deal at -$2.6 billion, and I wouldn’t be surprised to see Tesla’s share fall further if this deal materializes. There is absolutely no way anyone can make sense of this deal as both the companies burn through cash at a breakneck pace and have highly unsustainable business models.

The only reason why I think Tesla would want to buy SolarCity was to save Elon Musk’s reputation. SolarCity’s business model would have taken the shares to bankruptcy. The bankruptcy would have dented Musk’s image as a revolutionary, which in turn would have had a huge negative impact on Tesla.

As a result, it was important for Musk to prevent the eventual decline of SolarCity to cause a snowball effect into Tesla.

I have recommended shorting both the stocks in the past, and if the acquisition goes through, the short case for Tesla will become a lot stronger. Tesla longs should be cautious going forward.
Published on Jun 22, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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