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Tesla's offer to acquire Solar City

Tesla's offer to acquire Solar City

Really interesting announcement today. No surprise, I've been reading a lot of negative feedback on this offer. I'm in favor of it, though the timing is not the best. Then again, it could also be perfect timing to make this move.

eric.zucker | 21 June, 2016

I emailed solar city to get a quote, never got a response. I live in Europe, and they may not be operating worldwide.
Still, a short answer would have been welcome.

I'm installing solar at home, applied for the building permit. I have not yet decided which company will do it, or if I install myself.

Mike83 | 21 June, 2016

They operate in some US states. Not Europe but....

http://www.solarcity.com/residential/states?LeadSource=Search%20Engine&P...

eric.zucker | 21 June, 2016

SolarCity would benefit a lot from the exposure being highlighted in Tesla shops worldwide, and is a good complement to Powerwall and electric cars.

There is a good branding/communications benefit to Tesla in terms of promoting green mobility.

Solar City will have to expand its operations to wherever Tesla is present. That's complicated - lots of different electrical codes, building standards, shipping costs. etc. Plus there already are a myriad solar installers around, with cheap panels from China.

Overall, this acquisition would be hugely beneficial to SolarCity, but I don't see Tesla benefitting very much financially unless synergies with PowerWall installations can be exploited.

Hi_Tech | 22 June, 2016

Heard about it yesterday as well... initial reaction was "WTF"? Then, had a chance to think it through a bit more, while reading plenty of stupid articles from financial analysts.

My take is the following:
1. This plan seems to be on the same track/reason as building the Gigafactory... they want to reduce costs to customers (or increase profits) by bringing capabilities in-house, rather than sourcing out the work. In this case, we are talking about the capabilities of building and installing solar panels.

2. Keep in mind that Tesla plans on using plenty of solar panels, therefore this could reduce their costs for that part (though, this would be a very small part of the solar business). I'm referring to the panels required on all factories and super chargers.

3. Tesla does have quite aggressive plans for their Tesla Energy business. They expect this part can be as large as the auto business over time.

4. They will have to really figure out how to handle the "cash burn"... they can not afford to keep funding by diluting shares.

5. I also don't know enough about the financials of SolarCity... need to learn about the details there. Would appreciate input from anyone that is more familiar.

Tesla-David | 22 June, 2016

I think this is going to work out well for Tesla, and TSLA stock holders long term. I trust EM on this decision.

Mike83 | 22 June, 2016

I am very pleased with the merger. The negative spin is expected. With the ramp up I think the M3 will arrive sooner than planned.

Hi_Tech | 22 June, 2016

Let's raise some specific questions here to understand overall impact:
1. What impact would this merger have on the Tesla Auto plans: Model 3 development and ramp, Model S/X ramp?

2. What impact would this merger have on the Tesla Energy plans: Gigafactory build-out, synergies with PowerWall/Pack, sales plans/ramp, etc.?

3. How would this merger impact the financials: cost of operations, cash flow, future cash needs, sales opportunity, etc.?

Add other points that should be covered, but please try to give some details on why you think things will be good or bad, positive impact or negative.

PorfirioR | 22 June, 2016

I have been expecting this for years and had posted about it in this forum. The truth is that the market does not know how to value either Tesla or SolarCity, which is the case with many market disruptors. Here are some of the reasons why this makes sense to me:

1. Tesla battery technology and other technology transfer has been used by SolarCity for many years, even before Powerwall. This was, in my opinion, an unsustainable arrangement, particularly if either company wanted to make merger/acquisition decisions involving other third parties. The relationship created an unnecessary constraint in future business decisions, some of which were existential decisions, therefore, who better to make an existential decision than one of the two companies involved? So a merger or acquisition between Tesla and SolarCity was what I always expected. However, I do wonder if Tesla will later spin-off into "Tesla Energy" to include power generation and storage.

2. SolarCity does not have as large a technological advantage in their market as Tesla does in theirs, at least perceivably. SolarCity competes in a narrower market, while Tesla is no longer seen as just an "electric car company" they compete against other established car manufacturers (without the "electric" qualifier). The market impact potential of acquiring SolarCity is bigger for Tesla than it would be for anyone else.

3. SolarCity has a huge sales and services footprint, including their very own (and somehow under the radar) gigafactory in New York. This has implications far beyond the asset and balance sheet, as it would give Tesla additional leverage, both politically and market-wise.

4. Tesla stock is, as admitted by Elon himself, overvalued - although, thankfully, he stopped saying that in public. SolarCity stock is, in my opinion, undervalued (mostly due to regulatory uncertainty). For Tesla, this is the time to take the hit on their stock before the Gigafactory increases production and the Model 3 begins rolling out.

5. If Apple or Google had their ideas for Tesla (i.e. acquisition, competition, etc.), this would force them to change or abandon their gameplan. Although they probably had this in their list of scenarios, this announcement makes the game real. I am not sure if that was part of Tesla's calculations, but it would definitely change the playing field.

Full disclosure: I am a long-time stockholder for both SolarCity and Tesla Motors.

Rosscvp | 22 June, 2016

It seems a bit ridiculous if the quoted price of 2.8 billion is being offered for what is basically a middle man in the solar industry.I personally don't see this as a smart move by Tesla,especially when they just sold stock to accelerate the manufacturing of the model 3.

Hi_Tech | 22 June, 2016

Great points PorfirioR.

Some questions: What is the SolarCity factory in NY all about? Is that to make solar panels? Has that factory been completed/operationalized? What was the cost of building it?

Other questions that come to mind: What is the source of revenue for SolarCity (SC) [asking as they also do leasing, loans, etc. so % per quarter...]? What does their future revenue and costs plan look like? What assets do they have? What type of future revenue are already sold (e.g. 1 million installs which they will get paid over 20 years, etc.)?

It appears that Elon mentioned that he expects SC to go cash flow positive in "months", not years. That would be great news... reduced risk for sure!

Jcollins | 22 June, 2016

As a Tesla owner (car and stock) and admittedly a fan, I can't help but draw a comparison to some of the market's criticism layered on Jeff Bezos in the late 90's and early 2000's for foregoing profit in favor of building infrastructure. We know how that turned out. I've read and heard the almost relentless criticism directed at Tesla decisions starting with losing money on every car to spending too much on Superchargers to now bringing solarCity into the mix. My take is Solarcity fits within the plan that is in Musk's head.. It may not be intuitively obvious to all of us yet but trust that it will. In the meantime, I love my car. Best car I've ever owned (and I've owned a number of them.)

bmalloy0 | 22 June, 2016

I agree that it falls in the plan, but I'm not sold on the timing of it all. Tesla is in the midst of a massive cash burn to increase manufacturing rate tenfold, do they really need to spend another almost $3B to acquire SolarCity? Is it really going to benefit them THAT much that they couldn't postpone the acquisition until after the 500k/ye mark?

Hi_Tech | 22 June, 2016

The good news of this merger plan, is that it's a "all stock" purchase plan. No cash involved, therefore shouldn't impact Tesla's "cash burn" figures.

warren_tran | 22 June, 2016

The market believe Solar City worth zero. Hence the drop in Tesla market value (~2billions since the announcement) equal to the value of Solar City.

Investing in Tesla is a risky in all financial metric aspect. When you investing in Tesla, you are buying into and believe Elon vision and strategic move on the companies he affiliated with not the product.

When you bought Tesla stock, you bought Musk Industries. You bought a jockey, not a horse. Tesla stock doesn't make a lot of sense so now you have to keep riding him.

The shorters are and will have a field day with Tesla in foreseeable future.

Disclosure: I have no positions in any stock mentioned, and no plan to initiate any positions within the next 72hrs.

Mike83 | 22 June, 2016

Great article on using the giant fusion reactor in the sky.

http://www.huffingtonpost.com/entry/tesla-wind-power_us_576a9cdae4b0c025...

Tesla-David | 22 June, 2016

Thanks @Mike83, great article. As an MS owner, TSLA stock owner at IPO, and homeowner with 13.2 kWh PV system, and wait listed for Powerwall installation, I think EM is brilliant and trust his instincts. Time will tell, but I am betting that he is right and Tesla will be well positioned to embrace the coming revolution in renewable energy production/storage, and EV transportation.

jtgray | 22 June, 2016

Bad timing. Give it a year tesla could have bought SCTY for half the price.

Mike83 | 22 June, 2016

@Tesla-David With the Gigafactory coming on earlier than planned to get the PowerWalls and Powerpacks made and sell with PV systems and charging equipment it is perfect timing. SolarCity is down from its high and below the analysis's targets. Brilliant move. What is also cool is that I can get TSLA cheap now.
The minigrid's can be set up ANYWHERE in the world and without needing distribution systems. This is groundbreaking. With the M3 sales people can seamlessly integrate charging with the car. I wouldn't pay attention to the fossil fuel guys like the WSJ. They are being disrupted.

Haggy | 22 June, 2016

Tesla has top quality service and sales. SolarCity has poor ratings in places like Yelp and a reputation for poor support. Tesla has a clear sales model that cuts out dealing, makes prices clear up front, and doesn't involve pushy sales staff. SolarCity uses a different business model from other solar providers, makes things complicated, can be a liability if you sell your home (especially compared to having panels that are paid for), has prices based on complicated interpretations of electric bills and irrelevant comparisons (such as factoring in how much electricity you use at night to charge a car but not factoring in the lower EV rate paid to do that charging) and uses a high pressure pushy sales model. Their sales staff will tell you whatever they want in order to talk you into going with them, including that having their panels is an asset when it comes to selling your home, when those who have gone through it are posting the opposite.

Some Tesla customers use solar, and it's not a big deal to negotiate adding an NEMA 14-50 install into the deal with any solar provider at install time. It's a moot point if it's not done at the time the car is purchased, and won't come up if solar is put in when a customer has no plans for an EV, but later buys one. So the argument that it makes more sense for customers is tenuous at best.

If you will have to call Tesla to install solar panels, that will downgrade the reputation of Tesla service and support overall if it's one company. That's a terrible idea when the company still hasn't become mainstream and its reputation is important.

It's very clear that Tesla shareholders don't see value in this. Musk is far from objective. Aside from the fact that he likes the idea of solar, I can't see why he's even in that business. There are better ways to make money and there's nothing technologically innovative about SolarCity. It's merely the sales model that's different and it's anything but clear that it's an improvement over the alternative.

All the people who already think Musk is a crook and that Tesla is some sort of pyramid scheme will stop making inane comments that they can't back up, and start making comments that point to the real world experience of [Tesla] customers.

PorfirioR | 22 June, 2016

@Hi_Tech:
SolarCity's business model makes them look bad on paper. As anyone who has ever installed their own solar panels will tell you, one key decision metric is ROI. In the SolarCity model, the investment is on the SolarCity side and the "return" is on both sides, although mostly on SolarCity's. Therefore, until ROI is reached, it is not pretty to look at on paper. How the accountants represent that on the books (i.e. as debt), I don't really know.

Since this information is closely guarded, I can only guess what the ROI is. But let's say that the current ROI for SolarCity is hovering at around the industry average of 7.5 years (though I suspect lower). Since SolarCity is 10 years old, it is reasonable to expect positive cash flow soon. Like the infomercials say, "oh but wait!" Once the gigafactory begins producing cheaper solar panels, it should bring the ROI way down. Not only does that make every install profitable sooner, but it also brings other markets into play where solar could not previously compete.

There is a catch here that positive cashflow in SolarCity's model might actually not be the best news just yet because it could mean that new installations have reached or have started to reach the point of saturation.

One fly on the ointment is net metering and other regulations, which is a factor in making solar even more profitable in some places. But that tide rises all boats, so it would not be a factor in making SolarCity more or less competitive against its peers. The key business strategy is to bring the cost per watt down, plain and simple, and SolarCity is positioning themselves to be the cost leader through cheaper in-house manufacturing.

There was a mysterious rant by Elon during a recent Tesla shareholder's meeting that the next game-changing breakthrough is in building the machines that build the machines and that he was exploring a way to make manufacturing orders of magnitude cheaper. If one were to believe that,and Elon is usually quite convinced about his ideas, "verticalizing" the industry by bringing all manufacturing in-house is, like Elon said about acquiring SolarCity, "a no-brainer".

Now, should we believe it?

If Elon comes up with some sort of artificially-intelligent manufacturing model (i.e. robots training robots, robots fixing robots, self-programming, self-learning, etc) that can even accomplish a fraction of what Musk thinks it can, it would make Elon Musk the next Henry Ford and might even propel a new era for humanity. The "information age" is no longer a revolution. The "information affecting the atoms" is the direction we are heading next. That is the next frontier. Additive manufacturing (3-D printing for most people) is just the beginning.

P.S. for some reason I cannot post links, so sorry for rambling about info that is already posted elsewhere.

sp_tesla | 22 June, 2016

Haggy | June 22, 2016

As usual, well said.

Are you buying more TM shares and or selling more covered puts.

Johnn_hardy | 22 June, 2016

Eric.zucker, it is my opinion that Powerwall and charging electric cars are not workable, at least from a financial viewpoint. Each Powerwall can only store a very limited amount of power (7 or 10 kW as I recall). They can be chained, but the cost makes this a non-starter. I have an 85 Model S and do not charge every niight. Let's assume I drive 50 miles daily and charge daily. That would require about two hours on the NEMA 14-50 at 40 amps. So, two hours would be 19+ kWhs. Figure at least two Powerwalls, probably three.

To me the real value of Powerwall is in climates where outages are common and homeowners want backup power that is not generator based. I do realize that Powerwall can be used to suck in power during off peak periods to be used during peak times, but that is another dixcussion. My solar system produces 100% of my peak power with 5MWh left over for charging the S. It does not cover all of my off peak requirements by the cost there, based on my TOU plan is negligible. So, spending cash on a home's electrical infrastructure should first be spent on solar, and then if the numbers work, add Powerwall. But not for charging an EV.

carlgo2 | 22 June, 2016

Mike83 is right. Musk cringes at the thought that the EV revolution, all makes and models, would be largely powered by fossil fueled electrical generation. Critics point to that now.

Tesla Solar might put less emphasis on small rooftop systems and instead build large solar farms that would cover EV use and after that all else as well.

Al1 | 22 June, 2016

Solar is a fast growing industry. Solar City's market share at a current stock price makes it grossly undervalued and an acquisition target.

True, Tesla has big milestones ahead, yet again the company had to step up and grab this opportunity. This is going to be vote of confidence to Elon and trust Tesla will make much more use from this acquisition than Microsoft from buying LinkedIn.

Harrytiffany | 22 June, 2016

Some can see and some can not. I am surprised at the many who are so quickly negative. I send my best to you Elon as the "press" and " experts" dish it out (contempt prior to investigation). Not just a car company! April 30, 2015!!

Al1 | 22 June, 2016

Just a question, does this equation makes sense?

Solar panels + Tesla batteries = Tesla Supercharger

Where? Anywhere. Wal Mart, Cotsco, shopping mall parking lot, - anywhere with enough rooftop / parking space

dansplans | 23 June, 2016

The reasoning behind the announcement is so simple, everyone seems to have missed it.

I read that Tesla has received orders for around $1 Billion worth of Powerwall units. Solar City is their preferred installer and has the appropriate gear to go with it. Now they can make money on both ends of the transaction.

They probably will spin off into multiple business units in the future, to enhance shareholder value. No urgency there, as spin offs are most beneficial to profitable companies. It will be some time before Tesla has that problem.

jonathanpq21 | 23 June, 2016

Haggy's comment is very interesting. Bad Yelp reviews is the main reason I didn't go with SolarCity for my system (claims of bad customer service and pushing leasing instead of buying).

I wonder what they'll do with branding. Will they get rid of the SolarCity name and just integrate it into Tesla, or will they remain two entities that are connected to each other? That could have a big influence on the success of this deal for both parties. If they do completely merge brands, I hope they do a major revamp on the costumer service and sales end, because right now and for at least the first year following the merger, it would have a negative influence on Tesla's image.

If they can streamline the rooftop solar process- getting rid of all the bidding and haggling- while achieving the most competitive cost per watt through technological advances, scaling, and manufacturing, they could revolutionize the industry.

Of course the vertical integration with the rest of Tesla will help immensely as well. Being able to buy your car and simultaneously pay for all the energy you will ever need to power it will be an attractive offering. And of course, the ROI for solar panels gets way shorter with the increased usage that comes with an electric car.

Hi_Tech | 23 June, 2016

@PorfirioR - Great post. I've been digging into Solar City stuff yesterday and learning a bit about their business model as well, and why most financial analysts don't understand.

@Al1 - I like where you are going with that equation. Though, I think there needs to be grid connection, I believe you are on the right track. Hence, I do think there is a linkage between the two companies. It might not make a better car, but may drastically improve the profits on their Tesla Energy business which they expect to boom.

Jean PierreD | 23 June, 2016

i like Dansplan view. accurate.

Hi_Tech | 23 June, 2016

Agreed... I like Dansplan's view as well. That's pretty much the main point. It doesn't have to do with the cars, it has to do with the Tesla Energy space.

I've been trying to paste a larger reply I place on the web... but getting spam blocked.

Stormpath | 23 June, 2016

soo, I hope that the following occurs now...

perhaps we could see solar city/tesla charging stations along the interstate highways...most gas stations make much of their profit through sales of goods anyway, not gasoline. Imagine a facility designed for charging, with a few types of food choices, high end rest lounges, internet connections, weather forcasts, a dog walk area, etc....

that would be amazing to me...

Mike83 | 23 June, 2016

They already have a 500MWh contract in process. Tesla Energy is moving.

http://www.thecountrycaller.com/53678-tesla-motors-inc-tsla-wins-12mwh-p...

elephant in a bottle | 23 June, 2016

@Al1
Here's another way to look at it:

1 Pixel of Tesla Batteries + Array of Solar Panels ( covering 1 small corner of Utah ) = Tesla Energy = 1+ Trillion $$ industry

mrbarnes | 23 June, 2016

During the call, a question from Bloomberg News (Dana Hall) seemed to take Elon by surprise a little bit, but got him thinking.

Question is at 1:20:30 on the call, and I'll paraphrase: "Would having Tesla now selling battery walls and solar panels present an opportunity to work around dealer laws in states that don't allow Tesla sales, and therefore help sell cars?" Elon's response (again, paraphrasing) "well...yes, I guess...we could display cars in a gallery sense...I hadn't thought of that, but it could present an opportunity to market the cars to potential customers."

Jeff Hudson | 23 June, 2016

I think EM's offer to acquire Solar City is an ill-timed distraction and a poor use of much needed capital for other more important Tesla related initiatives.

jonathanpq21 | 23 June, 2016

@mrbarnes
Yeah, I wonder if they'll have to pay her for use of the idea haha!

eggoman | 23 June, 2016

I contacted SolarCity a couple months ago to schedule a time to have them quote me a solar system. I just got an email today that starting July 1 they are offering cash and loan systems only. No more confusing PPAs and leases.

carlk | 23 June, 2016

@mrbarnes

Thank you for bringing that up. I have not heard anyone mention that yet. Not sure how that would work although it does point out how illogical those dealer laws are.

compchat | 24 June, 2016

Solar City offers only cookie cutter installations. It's good news to hear that they might have the powerwall available soon. I've been waiting a long time.

bb0tin | 24 June, 2016

@mrbarnes
I do not believe that Elon meant to imply at all that 'I hadn't thought of that,'
He went on to explain why it makes no difference.

jonathanpq21 | 24 June, 2016

@bb0tin
That's sure what it sounded like to me. Did you listen to the conference call?

Nexxus | 24 June, 2016

We have the solar system and battery backup your house needs right here! And, oh by the way, we can sell you this neat little plug-in to go along with it. Would you like to test drive it first?

Yeah, sell the cars out of a PV store! Great idea for those states that won't allow direct sales.

bb0tin | 24 June, 2016

@jonathanpq21
Yes I did.
Elon was not talking about the dealership issue when he said "now that you mention it"

Here is the transcript.
http://electrek.co/2016/06/22/elon-musk-tesla-solarcity-tsla-scty-merger...

bb0tin | 24 June, 2016

@Go_Peddle_4_me
As Elon explained, it will make no difference with respect to the selling of cars apropos dealership issues.

SUN 2 DRV | 25 June, 2016

Solar and battery backup are the holly grail of future energy supply.

Why should solar city limit their target market to Tesla owners, which is the gist of this merger?

Wouldn't solar city be better off if they targeted ALL EV owners and ALL households? Wouldn't the whole world and future generations be better off if Solar City promoted the benefits of solar to the widest possible target market?

Tesla sells to a vertical market where their products only need to work well with themselves.
Solar City sells to a horizontal market where their products need to work well with all household electrical products from a huge number of third part manufacturers.

Merging Solar City and Tesla has very limited synergy because their value propositions to their target markets are so different. Tesla builds great cars and Solar City helps you save energy costs. The merged company will have an intersection of those value props meaning it will help Tesla owners save energy costs. BFD...

Mike83 | 25 June, 2016

The number of M3's ordered is well over 400,000. If only 10% order PV's which is conservative from what I've read they will have 40,000 installations already. If you review the SolarCity website they already do backup with Tesla and they do more PV rooftops. Not so sure I can understand your misunderstanding of their business.

carlk | 25 June, 2016

Tesla will sell majority of EV in the US in the foreseeable future. It will get more than its hands full just to support Tesla owners to go solar. Do you see the need for Apple to market accessories to Samsung or Blackberry phones?

warren_tran | 26 June, 2016

Comparing Apple to tesla is comparing Apple to orange.

One sell EV that cost ally least $35K where Apple phone cost $600. See the difference. Everyone have a chance to buy Apple phone without 2nd line of mortgage on the house.

olliejones | 26 June, 2016

Today's NYT article about the Tesla acquisition of Solar City basically says that Wall Street doesn't like it.

So what? "Wall Street" notoriously wants public companies to accumulate huge cash piles and do stock buybacks to jack up the share price. Look at Tim Cook's Apple. The "Wall Street" perspective is that businesses exist to buy them bigger houses in the Hamptons.

Is it possible the leadership of Tesla (Mr. Musk and his colleagues) has a different idea? So it seems. Starting a new car company in the 21st century had a lot of smart wall street analysts rolling their eyes. So does this venture. Perversely enough, it probably means they're doing the right thing.

(Dell Computer went private. Maybe they, too, have big ideas for innovation that Wall Street was squelching.)

The Solar City representative who called on me a week ago (pre-merger-announcement) said Solar City is planning to build a manufacturing plant in Buffalo NY. Like Tesla, they are actually ramping up to make real stuff. I suppose the stuff that goes on my roof will come from overseas, but that's OK.

I bet Tesla / Solar City can take advantage of Brexit. One of the biggest effects of Brexit will to give the boot to the financier plutocrats in the City of London. With the plutocrats gone, maybe north-central England's strong manufacturing culture will be a good place to make stuff for the next-generation electric grid.

A century ago, building out the electric grid was a green-field project. Reworking it, as Tesla plans to do, is a brown-field project: a retrofit. That's harder, more expensive, and far more time-consuming. It takes a different kind of market clout than a greenfield buildout. I hope Telsa succeeds at this, and I'm casting my lot with them.

But more than that, I hope they keep trying. I hope they keep ignoring the nattering next-quarter nabobs of negativism (thanks to Art Sohmer, VP Spiro Agnew's speech writer, for that phrase).

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