SAN FRANCISCO — Elon Musk inhabits a world of declarative superlatives.
On a conference call with investors early Wednesday, Tesla’s CEO called his company’s $2.8 billion offer for SolarCity a “no-brainer” that is “legally and morally correct,” a “zero-doubt” move that "we should have done sooner.”
What's more, Musk trumpeted that the deal could help propel Tesla toward being the world's first trillion-dollar company as “the solution to the earth’s climate change problem.”
Analysts aren’t so sure. And a steep drop in Tesla’s stock (TSLA) — down 10% in Wednesday trading, whacking $3 billion off its lofty $32 billion market cap — confirms investor skepticism.
Musk is touting the proposed deal’s ability to make the Tesla brand a one-stop-shopping experience. March into a Tesla store and you'll be able to buy SolarCity solar panels for your roof, Tesla's Powerwall to store that electricity, and one of three electric cars, the Model S, X and upcoming 3.
But there is a buzz of concern over Tesla’s ability to swallow a company operating in a volatile industry as well as Musk’s apparent conflict of interest as a director of both Tesla and SolarCity, which is run by his first cousin, Lyndon Rive. Musk is also the largest single owner in both companies' shares.
“Little in the way of synergies, much in the way of cash burn,” wrote Barclay’s analyst Brian Johnson in a note to investors, adding that he predicts the two companies would have a combined net debt of $2.5 billion.
“While no doubt the Tesla bulls will hail the combination as visionary, we believe the assumption of debt to fold in a solar company with limited synergies and uncertain growth or cash prospects only reinforces our negative view of Tesla,” Johnson wrote.
Musk dismissed such concerns in his call, which unfolded before dawn California time.
"We don't expect SolarCity to have a negative impact on Tesla cash flow," said Musk, whose fame and fortune are tied to his seminal role in creating PayPal, which led to both his SpaceX rocket company and leadership of Tesla. "This makes execution easier, not harder."
Musk no doubt is buoyed by the fact that solar installations are poised to increase 119% this year, according to GTM Research's Solar Market Insight Report, published in conjunction with the Solar Energy Industries Association. Much of that growth is expected to be in the industrial sector as companies look to benefit from cheaper, cleaner energy.
SolarCity (SCTY) is the nation's leading provider of solar solutions, accounting for 34% of home installations in 2015, compared to 12% for Vivint Solar and 3% for Sunrun. That said, SolarCity's stock has dropped 65% over the past year as the solar industry grapples with changing federal subsidies and tax-break rules.
"Solar is growing, but there's some regulatory uncertainty that plays a role here," says M.J. Shiao, GTM Research's director of solar research. "SolarCity in particular has been hit hard simply because they've missed their own targets and forecasts."
SolarCity's financial woes aside, some industry observers worry this that deal comes at a critical inflection point in Tesla's story and risks torpedoing the company's lofty market cap. Tesla has yet to make a profit — though Musk said he expects to this year — and 20% of Tesla's shares outstanding have short positions against them, implying heavy investor bets that the stock will fall.
In his “negative” assessment of the acquisition, S&P Global analyst Efraim Levy cites the potentially distracting nature of building on an acquisition just as Tesla is looking to make the leap from niche luxury-car builder (50,000 units a year) to mass-market electric automaker with 2017 Model 3 sedan (a targeted 500,000 units annually).
“We’re not quite as optimistic as Elon Musk is,” says Levy. “As an investor, I’m not sure you want an all-electric vehicle maker to become diluted by energy company initiatives.”
And then there’s the thorny corporate governance matter.
Jim Chanos, whose Kynikos Associates who has shorted both SolarCity and Tesla shares, said he was incensed by the "brazen Tesla bailout of SolarCity," telling CNBC that the deal was a "shameful example of corporate governance at its worst."
"This is about as clear an example of conflict of interest as I can think of,” says corporate governance expert Charles Elson of the University of Delaware, noting Musk’s 22% ownership stake in SolarCity. “If enough ire is raised by investors, it could cause a rethink of the deal.”
Elson says that such a deal between two publicly traded companies is rife with ethical questions, and Musk's offer to recuse himself from the vote on the proposed merger might not be enough.
"He might recuse himself, but the (other) directors have relationships with him that are difficult to untangle," he says.
For some analysts, the goal of creating one vertically integrated power peddler makes sense, particularly given moves underfoot to change net metering rules that would pay solar-equipped homeowners less for the energy they feed back to the grid.
Such rule changes would make Tesla's forthcoming Powerwall home electricity storage unit, which will be built at the company's $5 billion Nevada Gigafactory, even more attractive to consumers who want to funnel energy collected by solar panels into their Tesla automobile.
The concern is a lack of details on how such a match-up becomes a profitable enterprise.
"I get the convergence," says T.R. O'Neill, senior analyst at Irvine, Calif.-based Ascendiant Capital Markets. "The problem here isn't that it doesn't make sense, it is that Tesla has made no effort to communicate to investors what its M&A strategy or day-to-day strategy is. Tesla maintains no investor slide deck on its website and makes no effort to communicate strategy on its quarterly call, leaving a void where investors make up their own strategy."
But this is Musk's world, one populated by futuristic talk about living on Mars and high-speed hyperloop transportation networks. With visionaries, you often get just that. Broad plans for exciting journeys to be taken with great faith. So far, Wall Street has bought into Musk's vision for Tesla, but it remains to be seen whether the SolarCity deal proves a tipping point.
For Musk's part, his view of the landscape remains free of distractions.
“I’m highly confident we’ll be the world’s best manufacturer by a margin people don’t even think is possible,” Musk said on the call. “We’re trying to have the non-weird future get here as fast as possible.”
Follow USA TODAY reporter Marco della Cava on Twitter: @marcodellacava
