Coverage: Tesla’s stock drops after it offers to buy SolarCity

Tesla Motors Inc., whose CEO is Elon Musk, has made an offer to buy SolarCity Corp., whose chairman is Elon Musk, for $2.8 billion, sending the electric car company’s stock down and the rooftop solar company’s stock up.

Russ Mitchell and Ivan Penn of the Los Angeles Times had the news:

The offer to buy the rooftop solar giant is an extension of Tesla Motors’ sustainability mission, the electric car maker said.

“It’s now time to complete the picture,” Tesla said in a blog post. “Tesla customers can drive clean cars and they can use our battery packs to help consume energy more efficiently, but they still need access to the most sustainable energy source that’s available: the sun.”

Under the proposal, Tesla would acquire outstanding shares of SolarCity in exchange for Tesla common shares at a value of $26.50 to $28.50 per share, a 21% to 30% premium over SolarCity’s Tuesday closing price.

The Tesla board said its intention is to “proceed only on a friendly basis.”

Musk is the top shareholder of both companies. He is chairman of SolarCity and owns 22% of the company; at Tesla, he is chairman and chief executive and owns 21% of that company.

Charley Grant and Spencer Jakab of The Wall Street Journal report that the deal makes little sense:

Tesla’s bid for solar panel installation firm SolarCity on Tuesday afternoon is the sort of move that, even for the most Panglossian Silicon Valley investor, stretches the bounds of industrial logic. It also stretches some ethical limits given the fact that Mr. Musk is the largest, albeit a minority, shareholder in each firm. He also has borrowed personally to buy SolarCity shares, which are down by 58% in the year to date.

Although the offer is for shares, not cash, meaning that Tesla won’t have to go back to the capital markets well quite yet, the deal is far from the “obvious thing to do” that Mr. Musk says it is.

Both businesses, for different reasons, are cash hungry. In the past four quarters  alone, Tesla burned up nearly 50 cents of cash for every dollar of sales it made. But it was practically the U.S. Mint compared with SolarCity which burned nearly $6 for each dollar of sales.

Tesla may be the less sustainable of the two because SolarCity auctions off the tax breaks it gets for installing solar panels on suburban rooftops to outside investors. The auto maker, meanwhile, is about to ramp up spending for the project that will make or break the company—its mass-market Model 3 sedan. Its market value—some 3½ times that of far larger Fiat Chrysler Automobiles—already assumes wild success.

Mark Bergen of Recode writes about how Tesla’s stock fell due to the news:

Shares of the electric vehicle company fell nearly 10 percent in after-hours trading on Tuesday following the announcement of the acquisition.

It could just be nerves. The proposed deal allows Tesla to buy up SolarCity’s common stock in exchange for its shares, amounting to about $2.8 billion for Tesla. And it also amounts to some strange accounting, given the management overlap between the two companies.

That math checks out: Musk picked up more shares of SolarCity yesterday, putting his total at 22.2 million shares. Tesla made the SolarCity offer at a range of $26.50 to $28.50 per share. Of course, Musk owns a fair amount of Tesla shares — just north of 27.8 million, or 20.8 percent of the company.

Wary investors have sent Tesla stocks on short free falls in the past, too, after a negative analyst report and a sour recommendation from Consumer Reports.