Tesla Motors Inc (TSLA) Is Reaping the Fruits of a Bad Deal

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Maybe Elon Musk’s proposed merger of Tesla Motors Inc (NASDAQ:TSLA) and SolarCity Corp (NASDAQ:SCTY) isn’t such a great idea, after all.

Tesla stock Elon Musk

At least that’s what the market seems to be saying the way it’s treating Tesla stock and SolarCity shares today. Shares of both companies took significant hits Thursday, a day after and TSLA regulatory filings raised uncertainty as to how the cash-burning electric vehicle maker would pay for its acquisition of SolarCity.

Tesla stock was off more than 5% at one point in morning trading. SCTY fell by as much as 7.7%.

But this is only the most recent example of the market’s unease with the implications of Musk’s bet to bring the companies together.

TSLA SCTY
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Indeed, the tracks of both these names haven’t looked good ever since SolarCity accepted Tesla’s proposal. Have a look at the embedded chart, and you’ll see that Tesla stock is off about 8% on the deal and SCTY has lost 16%. The fact that the divergence is widening between the two stocks is also a concern.

To be sure, there are other factors influencing trading in these companies, but acquisition anxiety is clearly a big one. After TSLA’s most recent securities filings, there’s little wonder why.

If it feels like Tesla is always in need of cash, that’s because it is. The company disclosed that it has a $422 million bond payment coming up and — at the same time — needs to raise funds to support its proposed SCTY deal.

TSLA Goes Hat in Hand Again

Tesla doesn’t know how it’s going to get the money just yet. Here’s the key passage (emphasis ours):

“While Tesla expects that its current sources of liquidity, including cash and cash equivalents, together with its current projections of cash flow from operating and retail financing activities, will provide it with adequate liquidity based on its current plans through at least the end of the current fiscal year, Tesla is currently planning to raise additional funds by the end of this year, including through potential equity or debt offerings …”

Tesla says it has plenty of capital to pull of the SCTY deal, but just in case, it wants more. OK, that’s not terrible.

What’s alarming is that Tesla stock holders have no idea where the money is going to come from. They’re either going to be on the hook for more debt — which is not great — or have their ownership stakes diluted, which is worse.

This filing creates uncertainty, and remember: The market hates uncertainty. That goes double when the balance sheet and cash flow statement are so close to the bone.

At the end of last quarter, Tesla had $3.2 billion in cash and equivalents and $2.6 billion in long-term debt. It issued another $820 million in debt in the last quarter, bringing its 12-month total up to $2 billion. Over the same span, TSLA generated negative free cash flow of $136 million. Those free cash flow projections better be right.

Oh, and of course, Tesla Motors is not profitable.

Investors are right to question the wisdom of this proposed merger. There’s a lot to like about the long-term investment thesis for Tesla. Why mess with success?

No one should be surprised if shareholders vote down this deal — or be surprised if Tesla stock rallies on such an outcome.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/09/tesla-stock-tsla-solarcity-scty/.

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