Tesla Motors Inc Buyout of SolarCity Corp Shortchanges Stock Holders (TSLA SCTY)

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Tesla Motors Inc (NASDAQ:TSLA) publicly announced a plan to acquire SolarCity Corp (NASDAQ:SCTY) in June. In large part as a result of the Tesla interest, SCTY stock has rallied about 25% in the last month on hopes of a SolarCity buyout.

SolarCity SCTY stock

So, you would think that when TSLA stock execs moved to acquire SolarCity that it would include a juicy premium for SolarCity shareholders.

Think again.

The reality is that the SolarCity buyout shortchanges its stock holders. Worse, it seems that once again Tesla Motors CEO Elon Musk is bending the rules of Wall Street to meet his own personal goals regardless of how it affects shareholders.

SolarCity Buyout Red Flags

The all-stock buyout by Tesla Motors values SolarCity at only about $2.6 billion. That means shareholders will get 0.11 shares of Tesla for each share of SolarCity stock, at a value of about $25.83 per share.

That’s actually a modest discount to where SCTY stock was trading as of this morning. SolarCity stock was down as much as 5% as a result.

For his part, Tesla CEO Elon Musk is playing it cool. “I know about as much as you do about how the price was obtained,” he reportedly said on a conference call announcing the deal. The Wall Street Journal reports that Musk and “other key members of the boards of both companies” had recused themselves from any analysis of the proposal and pricing.

But Musk’s fingerprints are all over this. The CEO has long used unorthodox financing techniques, including loans from one of his disruptive companies to another — for instance, when Musk’s rocket company SpaceX bought $90 million in SolarCity bonds. He also has shown little regard for TSLA stock holders both by diluting them in secondary offerings and by saying things like he doesn’t bother to follow Tesla’s stock price.

SolarCity, SpaceX and Tesla also share directors and big-time investors. This includes Kimbal Musk, Elon’s brother, who sits on the board of both Tesla and SpaceX.

solarcity buyout tesla
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Tesla said in a Monday statement that the deal between TSLA and SCTY stock is being reviewed by a special committee of “independent and disinterested” SolarCity board members.

Yeah, right.

It’s not uncommon for acquirers to drive a hard bargain. And it’s not unrealistic that the Tesla buyout of SolarCity is priced right since nobody else really has much interest in SCTY stock right now and the company is deeply unprofitable and has fallen over 70% from its 2014 highs.

But something smells fishy about this deal, and shareholders of both TSLA stock and SolarCity should be on their toes.

Yes, an iconic CEO like Jeff Bezos at Amazon.com, Inc. (NASDAQ:AMZN) or the late Steve Jobs at Apple Inc. (NASDAQ:AAPL) can truly define a company if given enough influence and ownership in their personal vision. But it’s awfully risky when one man is allowed to get his way constantly … particularly when that man has so little regard for doing right by common shareholders, and is simply worried about his companies and his legacy.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/08/tesla-buyout-solar-city-stock/.

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