Tesla and SolarCity shareholders gave their final approval of the $2 billion acquisition deal that was heavily criticized in the past months. How did Elon Musk manage to change their mind?
After losing $4.8 billion of its market capitalization since the initial announcement of the merge, Tesla CEO Elon Musk has finally got what he wanted: an overwhelming majority of Tesla and SolarCity (NASDAQ: SCTY) shareholders voted in favor of the merger yesterday. Excluding Musk himself as well as some other "affiliated shareholders", 85% of Tesla (NASDAQ: Tesla Motors [TSLA]) shareholders supported the deal.
Ever since Musk announced his interest in acquiring SolarCity back in June, he has been dealing with strong criticism from direct shareholders as well as the industry experts who were mostly advising against completing the merger due to negative financial profiles of both companies. As soon as the news of Tesla's interest in SolarCity hit the market, Tesla's shares dropped 15.8% whereas SolarCity lost shocking 30.8%, with both companies losing significant portions of their market capitalization.
Considering that SolarCity's acquisition would come with a hefty $3 billion debt while Tesla had 8 straight losing quarters at the time, the immediate reaction of the shareholders is quite understandable. However, in the last few months, Musk has managed to change shareholders' mind and get the approval he was waiting for. Interestingly, even before receiving an official approval, Musk was treating SolarCity as an already integrated part of his company that was most evident during last month's event where Musk announced the first joint product of the two companies. The new solar roof was co-presented by Tesla and SolarCity executives but the entire presentation had an obvious feel of Tesla and SolarCity being one unified company.
Shortly after that presentation, Tesla shared a detailed post on its corporate blog explaining the company's rationale behind the deal and comparing people's uncertainty about the feasibility of the solar roof project to the lifecycle of Tesla's EV.
"Tesla has already shown through Model S and Model X, and with our unveiling of Model 3, that the future of automobiles is going to consist exclusively of electric vehicles. Every car will ultimately be electric. Those same naysayers may have similar feelings about solar and storage, but it probably would be unwise to trust them again. Indeed, we are just as confident that the future of energy generation will overwhelmingly consist of solar paired with an integrated storage system," Tesla wrote.
On top of that, Tesla expects SolarCity to bring significant monetary contributions, the topic that concerned many of the shareholders. In the statement, company said that SolarCity would add more than $500 million in cash to Tesla's balance sheet in the next 3 years whereas SolarCity's $3 billion debt was 50% non-recourse and could be easily compensated for by the cash flow coming from customer payments.
As SolarCity's debt was one of the main arguments against the deal, next to the fact that SolarCity is managed by Musks's cousins, Tesla CEO made quite a bold statement on Twitter by offering to take full responsibility for the debt, if needed.
@davidtayar5 Tesla will def absorb SolarCity debt. Altho extremely unlikely, I would pay it personally if need be. Debts must be honored.— Elon Musk (@elonmusk) November 5, 2016
By acquiring SolarCity, Musk wants to make Tesla a one-stop shop for consumers ready to make their cars and homes fossil fuel-free by covering every step of that process from energy creation, effective storage to consumption and, ultimately, transportation. The new solar roof product that Musk announced last month, is the first official collaboration between the two companies that Tesla expects to put on a full-scale production next summer. Musk promised that the solar roof would be priced the same or even less than a normal roof with electricity coming as a "bonus". He says that this is the first ever product that has an "apples-to-apples comparison to a regular roof".
"We’re trying to make an integrated product, where you can go to Tesla store and just say yes. It's seamless and you love it," Musk said yesterday upon receiving the results of the vote, as reported by USA Today.
Bloomberg reported that Tesla's shares positively reacted to the shareholder approval and climbed 2.6% to $188.66 at the close yesterday whereas SolarCity jumped 2.9% to $20.40. USA Today adds that the deal was additionally boosted by a recent endorsement of a financial advisory company Institutional Shareholder Services that gives recommendations to shareholders in difficult votings. Previously, the deal mostly received mixed recommendations from financial advisors. In addition to that, Tesla's surprisingly good Q3 results after 8 consecutive losing quarters also helped the company to win shareholders' favor.
However, the experts say that having Donald Trump as a new president-elect is likely to interfere with Tesla's "all solar and electric" plans. According to Bloomberg, one of the large investment groups called on Tesla to consider some changes in its corporate structure and invite "independent" directors in its management board in order for the company to survive in the new political environment.
With Trump inviting a famous climate change skeptic Myron Ebell to lead his EPA transition team as well as opening up the country's lands and waters for new fossil fuels explorations, Tesla might have a hard time gaining support for its new projects.