Is Sun Setting on Musk’s Solar City?

Is Sun Setting on Musk’s Solar City?

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Tesla and Solar City consistently make headlines as innovative, first-in class clean tech companies.  But the brainchildren of famed billionaire, Elon Musk, are coming under scrutiny this week amid the announcement that Tesla is looking to acquire Solar City.  Musk is Chairman of the Board and majority shareholder of both companies, where we owns 21% and 22% of shares, respectively.

According to the Los Angeles Times, this latest proposal is raising eyebrows about the future of both companies: “For years, fans and investors have been buying into Musk’s unconventional approach to corporate finance.”

“He used his own money to help start Tesla Motors Inc. His rocket firm, SpaceX, bought bonds backed by rooftop panel sales of SolarCity Corp., of which he is the No. 1 investor. He took out $475 million in personal lines of credit to boost his investments in those companies.”

“But investors and analysts have grown wary of the latest plan. Musk’s announcement Tuesday that he wants Tesla to buy SolarCity quickly raised concerns about conflicts of interest, unclear motives and shaky financials.”

Despite assurances from Musk that this acquisition is in the best interests of both companies, the investment community doesn’t seem so sure. In addition to Tesla’s stock plummeting after the announcement, investment analysts have downgraded it saying, “investors were likely to view the proposed bid as a ‘bailout’ and a ‘distraction’ to Tesla’s own production hurdles,” according to the Times.

Noting that both Tesla and Solar City are unprofitable and depend on government subsidies to continue operations, recent Times reporting is made more interesting by last week’s release of a BizJournals list of the highest-paid Bay Area executives under 40 in 2016. On it Lyndon Rive, Musk’s cousin and the 39 year-old CEO of Solar City, led the pack for receiving $77.3 million in compensation for 2015. The second most highly paid young executive is Tanguy Serra, Solar City’s 38 year-old President, who made $15.3 million (roughly five times less than Rive) during the same time period.  To some, this level of executive compensation, amid broader questions about the companies’ long-term strategies and financial security, make Musk’s latest move all the more curious.

Even still, all is not lost for the real life Iron Man, as some of Musk’s investors are supporting this transaction. Joe Dennison, a portfolio manager for Zevenbergen Capital Investments, calls the acquisition “a natural evolution of their [Tesla’s] mission to transform transportation into a sustainable business,” according to Reuters. Likewise, Gavin Baker, who runs the Fidelity OTC fund, the second largest mutual fund investor in Tesla, said, “We remain fans not just of Tesla products, but of the concepts and potential future partnerships behind the company. We foresee fruitful synergies between say, Tesla and SolarCity – or any company that can benefit from superior battery technology.” Notably, 45% of Tesla investors hold shares in Solar City as well.

For his part, despite the questions and plummeting stock price, Musk remains steadfast in his commitment to this path. “I have no doubt about this – zero,” he said on an analyst and investor call early Wednesday morning. “We should have done it sooner.”

 

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