Musk’s SolarCity Bid a Rare Time Investors Don’t Buy Vision

Elon Musk is accustomed to shareholders snapping up whatever his Tesla Motors Inc. has to sell. Now his plan to merge the electric-car maker with struggling SolarCity Corp. has him confronting a rare case of investor unrest.

“This is a high-risk proposition with my money,” said Ross Gerber, a self-described fan of Musk’s and chief executive officer of Gerber Kawasaki, a money-management firm with more than 25,000 Tesla shares. “I don’t need Elon picking stocks for me. That’s my job.”

It’s a pivotal moment for Musk, the 44-year-old billionaire whose ability to continually raise money from faithful investors has kept unprofitable Tesla going for more than a decade. Tesla shares fell 10 percent Wednesday as the proposed $2.9 billion deal gave different investors something to dislike. For some, it was the risk of distraction as the mass-market Model 3 sedan arrives next year; others perceived ickiness in taking on more than $3 billion in debt carried by a company run by Musk’s cousins. And that’s all before the basic question of merging an automaker with an installer of solar panels.

The investor pushback and stock-price slide began as soon as Tesla disclosed its intention on Tuesday, including a downgrade on the shares that evening by Oppenheimer & Co. Musk recoiled, scheduling a second conference call with investors for Wednesday morning -- to little avail. SolarCity stock rose 3.3 percent on Wednesday to $21.88, far below Tesla’s proposed range of $26.50 to $28.50 a share.

Gerber took to Twitter to tell other Tesla investors to vote against the deal. “We are big supporters,” he wrote. “Not of this deal. Tesla shareholders are getting shafted.”

Even before the plan was disclosed, Musk was taking steps to avoid potential minefields in corporate governance. When Tesla’s board voted on June 20 to move forward with the offer, it used different advisers than it did on May 19, when it sold $1.4 billion in new stock. Investors in that offering weren’t told that Tesla soon would be using its equity to take on SolarCity, which had negative operating cash flow of $790 million last year.

Musk used his customary banks, Goldman Sachs and Morgan Stanley, as lead underwriters on the stock deal. He went to investment bank Evercore Partners Inc. for the SolarCity proposal, people familiar with the situation said.

On Thursday, Morgan Stanley’s own Tesla analyst weighed in, joining the ranks of those who have panned the potential deal. Adam Jonas, one of the most bullish analysts on the automaker, lowered his recommendation on the stock to equal-weight from overweight and reduced his target for the shares price to $245 from $333.

One-Stop Shop
Musk’s argument for the combination is that wealthy, environmentally minded consumers will get a one-stop shop for green, sustainable energy and mobility. They can buy their electric car and home storage battery from Tesla and keep them charged up with the sun’s rays, thanks to SolarCity’s panels.

“Anyone who is product-focused sent me sort of a congratulatory note and like why-didn’t-you-do-it-sooner sort of message,” Musk said. People more focused on finances were “a lot more worried about it.”

The proposed combination is problematic, Barclays analyst Brian Johnson said in a research note. Combining the two companies will simply compound negative cash flow to a combined $2.8 billion next year. That means Tesla would need accommodating equity markets, “which is far from certain,” he wrote.

It takes several years for consumers to get a payback on the solar panels, and electricity from power utilities is cheap, said David Whiston, an analyst at Morningstar Inc. in Chicago.
Leap of Faith

“Tesla’s investors would now be taking on the risk of electric cars and solar power,” Whiston said. “As an investor, you’re really getting your patience tested with this deal. It’s a leap of faith.”

Musk’s announcement fired up short sellers, who were quick to criticize the bid because Musk is the largest shareholder in both companies and his cousins, SolarCity CEO Lyndon Rive and Chief Technical

Officer Peter Rive, each own 2.3 percent of the solar company’s stock.

Doug Kass, whose Seabreeze Partners Management has a short position in Tesla, said the deal would help the solar provider at the expense of the car company.

“SolarCity’s proposed non-arms-length transaction with Tesla raises governance issues for both Musk and TSLA’s board,” Kass wrote in his RealMoneyPro column. “It also increases Tesla’s financial-risk profile and dilutes what TSLA shareholders previously thought they had: a pure play on electric cars and batteries.”

Business Wisdom
Tesla shareholders with long positions also may raise concerns about corporate governance and the business wisdom of the proposal, said Gary Hewitt, director of governance research at Amsterdam-based Sustainalytics, which provides research to investors.

“There are governance conflicts everywhere, with Musk being a major shareholder on both sides of this deal, and he and another director also on both boards, as well as a lot of familial relationships,” Hewitt said. “Those connections complicate decision making.”

To avoid conflicts of interest, Musk -- who owns 21 percent of Tesla and 22.5 percent of SolarCity -- recused himself from voting at the June 20 Tesla board meeting and when the SolarCity board votes. So also did Tesla lead director Antonio Gracias, who owns almost 40,000 shares of SolarCity.

That helps, but the companies still are very cozy. JB Straubel is Tesla’s chief technical officer and sits on SolarCity’s board. Nancy Pfund, who is on the SolarCity board, was an early investor in Tesla and bought one of its first Model S cars. John N.H. Fisher from venture capital fund Draper Fisher Jurvetson is on SolarCity’s board, while DFJ partner Steve Jurvetson sits on Tesla’s.

“If the shareholders vote a resounding ‘no’ then it’s a new paradigm for Elon,” Morningstar’s Whiston said. “The shareholder vote will be the real test.”

By David Welch and Carol Hymowitz