Tesla (TSLA) made a big bet on solar energy when it purchased the debt-laden SolarCity for a hefty $2.6 billion in 2016, but the investment is adding problems rather than profitability at this point.
Shares of Tesla have rebounded in early afternoon trading, marking a rare modest gain after leaked emails from CEO Elon Musk suggested demand is sustaining for the automaker.
However, the familiar problems in its debt position are not rolling off any time soon, with many analysts pointing to the drag that the company's massive "no brainer" investment is left lingering on its balance sheet.
Morgan Stanley analyst Adam Jonas called the acquisition of SolarCity essentially a "controlled detonation", aimed at winding up a company before it goes bust.
The solar company, founded by Elon Musk's cousins Peter and Lyndon Rive, and whose board was chaired by Musk himself, was in a precarious position at the time of its buyout, weighed down by the burden of its $2.9 billion debt pile at exorbitant interest rates.
Most pertinent for Tesla shareholders, there is another convertible bond payment coming on SolarCity's obligations in November, to the tune of $566 million from bonds issued at a 14.1% yield.
Shareholders pushed back en masse against the takeover, citing fiduciary irresponsibility of the board, which includes relatives and "close friends" of Musk, in approving the deal.
That battle continues to this day, as there are currently seven outstanding suits in Delaware after a move to dismiss the cases was denied in March 2018, according to Tesla's SEC filings.
A trial hearing is set for March 2020.
Disgruntled former employees have even alleged outright fabrication of sales figures in order to prop up the questionable deal.
According to a civil lawsuit filed in San Diego County Superior Court in mid-2018, the former sales employees are alleging that fake sales accounts were created, in part, to justify SolarCity's high valuation for Tesla's buyout.
Tesla has denied the allegations contained in the suit.
Crony Capitalism Questions
While the allegations of nepotism stemming from Musk's decision to essentially bail out his cousins' struggling enterprise are to be expected, there are more damning allegations looming.
Much like Tesla, SolarCity was the beneficiary of numerous tax credits for its clean energy installations. Most notable among its subsidies was the "Buffalo Billion" project that pumped funds into SolarCity for a factory in the western New York city.
According to The New York Times, $750 million was granted to SolarCity, headlining the subsidies. Reuters reported that the subsidies were broken down into $350 million to build a factory, $274.7 million for equipment and $125.3 million for additional costs.
The deal has recently come under fire as allegations, and even convictions, for bid fixing have brewed in recent years.
Beginning in late 2016, federal prosecutors lobbed corruption charges against state officials handling the development program.
By mid-2018, multiple convictions for bid-rigging in the subsidies were achieved by prosecutors. Still, none of the cases has implicated Tesla or SolarCity directly.
For Tesla specifically, the project has also forced the company to be partnered with the SUNY Foundation, which entails numerous obligations.
Most prominently, the requirements specify that employment at the factory must reach 1460 people by April 2020, a significant increase from a workforce that was cited at about 800 in late 2018. Worse yet, the workforce was reported to be shrinking in early 2019 rather than growing with many operations apparently all for show.
"Under this agreement, we are obligated to, among other things, employ specified minimum numbers of personnel in the State of New York and spend or incur $5.0 billion in combined capital, operational expenses, costs of goods sold and other costs in the State of New York during the 10-year period following the completion of all construction and related infrastructure, the arrival of manufacturing equipment, and the receipt of certain permits and other specified items at Gigafactory 2," Tesla's 10-K filing states. "Any inability on our part to comply with the requirements of this agreement may result in the payment of significant amounts to the SUNY Foundation, the termination of our lease at Gigafactory 2, and/or the need to secure an alternative supply of PV cells and modules for our solar products."
The fine levied for any inability to comply with its requirements would be $41.2 million to the SUNY Foundation.
"A contract is a contract," Governor Andrew Cuomo was quoted as saying in the Buffalo News. "The way we structured this transaction, it's not a goal, and it's nice if you make it. ... It's a benchmark. If you don't make it, you pay us back."
Also, Panasonic (PCRFY) is the main supplier for the project, which has recently become a messier partnership picture as Musk lashes out at the company for provision of batteries to cars.
The company recently acquired Maxwell Technology in order to accelerate its own in-house battery production and move away from Panasonic. It is unclear how this might affect existing contracts for the Gigafactory.
However, all of these business and debt concerns are irrespective of the actual business. That isn't helpful either.
Since Tesla purchased SolarCity, installations have dropped more than 76%, while the company has steadily cut staff and reduced spending on the project. The company has also significantly cut prices in order to drum up demand for the installations, while still struggling to keep up with existing orders.
With litigation risk abounding, demand lagging, and contract conundrums all coming to the fore, SolarCity may go down as one of Musk's great follies.