On July 31, Tesla Motors announced it had reached an agreement to purchase SolarCity for 0.11 shares of TSLA for each SCTY share, a 20% premium to the closing price of SolarCity.
The deal is seen closing by the end of the year. Besides the glaring corporate governance issue with this deal -- Elon Musk is the largest shareholder of both companies, although it's true that he refrained from voting on the deal -- neither company is profitable. Both require billions more in financing to reach their objectives.
According to the press release, the deal would "create the world's only integrated sustainable energy company". Management believe the combined company would save an estimated $150 million in direct costs in the first full year after closing. It's not entirely clear how the merged company would create an integrated sustainable energy company, nor is it clear where the $150 million in savings would come from. One company installs solar panels on roofs, and another builds cars.
In fiscal 2015, Tesla generated nearly $5 billion in revenue and SolarCity reported $400 million in revenue. However, Tesla burned through $2 billion in free cash flow and SolarCity torched over $900 million. At the end of May, Tesla announced a public offering of $2 billion worth of stock, with about $1.4 billion being sold by the company and that's on top of an earlier $760 million raise. Tesla ended the most recent quarter with $1.4 billion in cash and is burning through about $400 million each quarter.
Even without SolarCity, Tesla will have to raise more money sometime in 2017. The company is using the money to ramp the production of its Model 3 vehicle. The Model 3 is expected to retail at $35,000 before incentives.
On Aug. 3, Tesla reported a second-quarter fiscal 2016 loss per share of $1.06, well below the consensus expectations of a loss of $0.58. Non-GAAP revenue of $1.6 billion was up 31% from a year ago. Gross margin was 20.8% on a non-GAAP basis. The company reported a non-GAAP loss of $150 million. During the second quarter, Tesla invested $295 million in capex to increase production capacity and to accelerate Gigafactory construction. For 2016, Tesla expects to spend $2.25 billion in capex in support of its accelerated production plan for the Model 3.
Management believe the company is on track to support deliveries of approximately 50,000 vehicles in the back half of 2016. The company plans to exit the third quarter with a production rate of 2,200 vehicles per week and then get to 2,400 vehicles per week by the end of the fourth quarter.
I like the cars and I think the company is doing extraordinary things, but Tesla has yet to turn cash flow positive. The company must continue to raise and spend money to support its electric car vision, which has made it difficult to hold the stock. Just last week, the company announced it drew down a $300 million bank loan from Deutsche Bank to cover its leasing program and said it plans another capital raise in the fourth quarter, despite ending the second quarter with $3.25 billion in cash.If the SolarCity acquisition is successful, the company will have to raise billions more, which makes it very difficult to see any light at the end of the tunnel. Amazon ( AMZN) spent money for 13 years before investors could see results and I'm afraid it's the same with TSLA. If interest rates increase, it could get more difficult for the company to raise money. I would sell TSLA and wait for a better (lower) entry point if you believe the merged company can be as successful as it claims.