Tesla and SolarCity: When Acquisition Strategies Run Amok

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by Paula Mints

When two companies with negative financials and high debt marry a good response to the nuptials is … Huh?

When Toto pulls back the curtain in the Wizard of Oz to reveal that the Wizard is just a normal man with no special powers the Wizard says: Pay no attention to the man behind the curtain.

In the case of the proposed stock acquisition of SolarCity by Tesla pulling the curtain would reveal two debt ridden companies with cash flow problems.

Just the Facts Please

The facts are: two companies with high debt and consistent net losses have joined their net losses and debt to enjoy the synergies offered by Tesla’s (TSLA) electric car and Powerwall Lithium Ion battery technologies with SolarCity’s (SCTY) residential/commercial lease business model and its Silevo crystalline cell technology.

Other facts include that SolarCity has experienced setbacks with its module assembly/cell manufacturing ramp up and optimistic announcements aside are likely far away from com-mercializing its technology.

Once SolarCity’s PV cell/module technology is commercial it will be competing in a market with significant downward price pressure. Also, given that China’s PV cell/module manufacturers are ramping capacity in countries that are not subject to import tariffs competition on price will get a lot more painful in the near future.

Also to be considered is that with demand for solar leases slowing SolarCity has announced that it will compete in the highly competitive utility scale space, a segment of the PV market that is highly capital intensive on a much bigger scale.

Finally (or, really not finally) the company’s reliance on debt renders it highly vulnerable.

Now to Tesla: facts include consistent net losses, high debt and a residential/commercial battery product that is not widely deployed and is quite expensive.

Both companies have liability/asset ratios over .50, which means that a higher proportion of each company’s assets are financed by debt.
So … just where is the synergy in combining two companies into a massive, debt-laden, clean technology powerhouse?
The proposed acquisition DOES make sense for SolarCity, which can be viewed as the weaker party. For Tesla, it only makes sense when thought of as a lifeline for SolarCity.

Table 1 (click for larger version) offers total revenues, net losses and the Liability/Asset ratio for SolarCity and Tesla from 2010 through 2015.
Table 1
Tesla is not the only company to recently make interesting acquisition decisions. SunEdison, currently in bankruptcy, went on a buying spree with the goal of creating a massive clean technology powerhouse and now finds itself selling assets and seeking a busi-ness-savior-marriage of its own.

Paula Mints is founder of SPV Market Research, a classic solar market research practice focused on gathering data through primary research and providing analyses of the global solar industry.  You can find her on Twitter @PaulaMints1 and read her blog here.

This article was originally published in the June  30 issue of  SolarFlare, a bimonthly executive report on the solar industry, and is republished with permission.

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