In a filing with the Securities and Exchange Commission yesterday, Tesla gave some details on why it did the deal in a joint blog post with SolarCity, a presentation outlining the potential savings from the combination. There were also many details on the next steps involved in getting approval from both sets of shareholders.
There will likely be more questions posed to Tesla management from sell-side analysts on Wednesday when Tesla reports its second-quarter earnings.
From the day this deal was first proposed a few weeks ago, we have been skeptics. While we understand the attractiveness of a combination from a SolarCity shareholder perspective, as well as from Elon Musk's personal perspective (with large shareholdings in both companies tied to personal lines of credit that have been extended to him), we have never understood the strategic rationale for the combination of Tesla and SolarCity from the Tesla shareholder perspective.
In the details released by Tesla in its SEC filing, as well as in a "Master Plan, Part Deux" blog post 12 days ago, Musk and Tesla have attempted to provide the strategic rationale for the combination of the two public companies. In our opinion, however, the rationale still fails to answer many questions.
In the Master Plan blog post, Tesla said it will focus on these key planks for the next decade:
- Integrate energy generation and storage
- Expand to cover the major forms of terrestrial transport
Obviously, SolarCity only fits with the first plank in that plan. Musk's explanation for that section was:
"Create a smoothly integrated and beautiful solar-roof-with-battery product that just works, empowering the individual as their own utility, and then scale that throughout the world. One ordering experience, one installation, one service contact, one phone app.
"We can't do this well if Tesla and SolarCity are different companies, which is why we need to combine and break down the barriers inherent to being separate companies. That they are separate at all, despite similar origins and pursuit of the same overarching goal of sustainable energy, is largely an accident of history. Now that Tesla is ready to scale Powerwall and SolarCity is ready to provide highly differentiated solar, the time has come to bring them together."
These same ideas were included in the SEC filing. The presentation states that investors should think of Tesla as the "world's only integrated sustainable energy company" rather than a car company.
If Tesla is an "energy company" and not a car company, it's odd that three of the four parts of the 10-year Master Plan seem to be car-related (expand to cover major forms of terrestrial transport; autonomy; sharing) and only one plank is energy-related (integrate energy generation and storage).
Investors should hear more about why SolarCity's energy-generation capabilities are better than any other solar company, which Tesla might have considered buying so that it could be in the energy business.
There are also scant details about how SolarCity's power generation abilities will allow for better storage. What can SolarCity's panels do with Tesla's Powerwall technology better than any other possible solar panel out there? Batteries and storage are still a key requirement for Tesla either as a car company or an energy company, but there hasn't been a lot of explanation yet on what SolarCity brings to the table on that front.
The Tesla presentation points out that its existing retail outlets will be able to cross-sell SolarCity panels. There appears to be an opportunity in the southeast U.S., especially where there are Tesla retail outlets but where SolarCity sales have been slower compared to the southwest U.S. But just because Tesla retail outlets can cross-sell something doesn't mean they should.
Does Tesla want to continue to be committed to the consumer-focused sales force SolarCity has built over the years?
Let's hope Tesla management will begin to provide these details on Wednesday's earnings call.
In the meantime, over the next 45 days (until mid-September), SolarCity will have a "go shop" period where it can go out and solicit higher bids for the company than Tesla's. After that, a majority of "disinterested" (i.e., non-Musk or non-founder) investors will have to vote in favor of the deal. The government will have to sign off on the deal as well.
Expect Tesla's disinterested shareholders to ask for much more information on the strategic fit between SolarCity's products and Tesla's long-term storage and battery needs over the next two months.
You should also anticipate Tesla discussing more about its potential cash needs post-deal. In the SEC filing, for example, Tesla mentioned that it had modified one of its credit lines taken out last year such that SolarCity couldn't access the credit line even if it becomes a subsidiary of Tesla. There were some other modifications made to the credit agreement related to SolarCity that were not disclosed in the filing.
Tesla's disinterested investors need to know about the potential cash needs of Tesla -- the energy company -- going forward and also the strategic rationale behind the deal in order to approve it. To this point, Tesla management has not supplied these.