Well, it’s official. Elon Musk’s empire is a bit smaller — at least in terms of operating companies. Electric roadster maker Tesla Motors Inc (NASDAQ:TSLA) finally was able to swallow solar panel installer SolarCity Corp (NASDAQ:SCTY). The merger was “overwhelmingly” supported by shareholders on both sides.
It didn’t hurt that Musk was the largest shareholder in both TSLA and SCTY, even though he sat out the vote.
Nor that shareholders in SolarCity knew how dire their situation was.
The deal is done. The question is, what happens next. And the answer may not be as clear as Musk hoped or as bright.
A Big Vision For TSLA Stock
For Musk, the fact that Tesla and SolarCity were separate companies actually was an accident and more about raising initial capital than about having two separate firms. The plan was always to have a single “green” energy firm that would sell energy generation, storage and clean energy transportation products to its customers under one roof.
With more than 85% of the votes cast towards TSLA swallowing SolarCity, that vision is coming true.
The hope is that Tesla will be able to deliver on various synergies that it promised. These include combining its battery technology, engineering capabilities and retail outlets with SCTY’s solar industry know-how, huge customer base and — perhaps more importantly — its huge financing/banking partners. Musk and Company have also promised some big-time cost savings in the neighborhood of $500 million over the next few years as the two firms join together.
But was missing in the deal and the vision was profits.
Neither firm is profitable. Sure TSLA managed to eke a small profit this past quarter, by requiring everybody to put their noses to the grindstone. Reports have even swirled that things like coffee in the breakroom were eliminated to do that. That’s not the same thing as being “profitable.” Meanwhile, SCTY hasn’t been profitable in what seems like forever as its model of solar installation is struggling under the weight of higher capital costs.
There’s more “vision” and “hope” behind the TSLA and SolarCity hook-up than actual money. And investors are about to find that out the hard way.
Tesla Is Now the Ultimate Cult Stock
What really is happening is that investors have bought into the idea and the cult of Musk. And that’s a very expensive proposition.
SolarCity continues to bleed cash as its model of funding panel sales via loans and leases requires plenty of upfront capex. SCTY’s net debt — which includes recourse and various convertible bonds — sat at roughly $1.371 billion when the merger went through. That’s about double what it was a year ago. Meanwhile, its cash burn rate has only accelerated in the last quarter, once you back out the amount of cash on hand via a bond sale.
And guess who is now on the hook for that?
With Tesla now having gained SolarCity’s history of debt, zero operating profits and hemorrhaging cash, analysts now estimate that TSLA could be hurdling itself towards insolvency. CAPEX spending at Tesla is expected to be a $1 billion in the fourth quarter alone.
Tesla did manage to achieve positive operating cash flows of $424 million during the last quarter. But at the same time, it also managed to increase its accounts payable and accrued liabilities by over than $600 million. It seems that TSLA has its own cash burn issues. That’s not a recipe for financial success, but one for disaster over the long term. Especially when you add SCTY’s problems to the mix. Net debt at the combined Tesla/SolarCity will be in excess of $6 billion.
To prevent that, TSLA is going to smack its new shareholders right in the face with a big-time equity raise. While Musk has said they wouldn’t right away do a raise, it’s going to have to, or come up with some other kind of financial engineering to raise cash.
But given the fact that Tesla has seen its share count rise to over 157 million in just a few short years based on multitudes of equity raises, I’d be willing to bet that they go down this path again.
As a TSLA shareholder who now has to shoulder the burden of SCTY’s failed business model, I would not be so happy right now. But it doesn’t matter, because Tesla trades on the vision of the future, not so much current fundamentals or funding ability.
Tread Carefully In Tesla Stock
And look, this isn’t to be negative on the vision. The vision is actually pretty great. Creating a cleaner future is something we all can bet behind. But the like Telsa’s namesake inventor — Nikola Tesla — vision may not translate into money or profits.
Tesla ended up dead broke, but others were able to use his inventions to create some wonderful things.
With all cash needed to continue funding Tesla’s expansion and now pay for SCTY’s various missteps, the same could happen to current shareholders of TSLA stock. At bare minimum, we could see a huge share price decline once investors have enough of “vision” and start demanding real profits.
In the end, the message is clear — don’t get too wrapped up in the cult of Musk and tread carefully in the post-merger Tesla. Too much of a good thing could burn you
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
