Tesla Motors Inc (NASDAQ:TSLA) is currently in talks with SolarCity Corp (NASDAQ:SCTY) and it seems like the automaker is inching closer to finalizing the deal. Elon Musk, Tesla’s CEO, has faced immense criticism for his decision to acquiring what many analysts deemed as an “unprofitable” venture.
Tesla Motors Inc. is offering an all-stock deal to take over SolarCity for $2.8 billion. But the proposal received a cold reception from investors and analysts alike. Musk is proposing the integration of Tesla’s electric car and SolarCity’s solar energy technologies to coax shareholders to complete the deal.
“The market obviously hates this,” said Shawn Kravetz, a fund manager at Esplanade Capital LLC in Boston who owned SolarCity shares. “There are symbiotic relationships here, but cousins should not get married.”
At the moment, SolarCity is in a financial turmoil with an increasingly underwhelming profitability position. Critics question why Tesla would go out of its way to acquiring the struggling solar firm but some analysts believe that the executive is trying to save SolarCity from bankruptcy.
Musk serves as the chairman for Tesla and SolarCity. The merger would allow Tesla to support the struggling solar firm financially so it does not shut down completely unlike Sunedison, which declared bankruptcy early this year. Sunedison is one of the largest solar companies in the US.
Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware said the planned takeover puts “your head in the conflict-of-interest blender.”
Early this month, Tesla announced that it has renegotiated the company’s purchase terms with SolarCity. According to the latest reports, SolarCity’s share price has dropped from $26.50-$28.50 to $25.83. SolarCity shareholders would receive 0.11 Tesla shares for every SolarCity shares they own.
As many Wall Street analysts explain, the deal is high risk but there could be a chance of return. Musk appears to be banking on SolarCity’s concept and believes that the deal may generate higher returns, provided that the acquisition will be approved by SolarCity shareholders. In a report by Wall Street Journal, Musk noted that the deal would “bring together two loss-making entities” and while the deal is deemed as risky, it could open doors to “new opportunities.”
Tesla recognizes the demand for renewable sources of energy that’s why it is supporting smaller companies that offer alternative power sources. As the largest residential solar provider in the US, SolarCity is instrumental to tapping a potentially profitable segment.
However, Musk and SolarCity CEO Lyndon Rive are both bullish on the deal. If it pushes through, the transaction is expected to bring over $150 billion in cost synergies. In addition, SolarCity will enable Tesla to come out with batteries with rooftop solar panels and other products. A special committee is looking into the deal and it appears that the merger is likely to be finalized soon.
Following the acquisition proposal, Tesla’s shares plunged by a staggering 12.3 percent. Tesla Motors Inc. has a market cap of $33.49 billion and a current share price of $229.08. The carmaker’s stock is up 1.29% as of Wednesday.