Tesla Falls After Cash Needs Exposed by SolarCity Merger Filing

For Elon Musk, the ifs are piling up.

A day after fresh disclosures about Musk’s controversial plan to merge his Tesla Motors Inc. and SolarCity Corp., his money-losing solar company, shares of both companies plunged anew Thursday.

Tesla fell the most since the acquisition was announced in June, raising fresh doubts about whether Musk can pull off his deal to meld two central pieces of his empire — and save the troubled SolarCity.

The latest developments add to the pressure that’s been mounting for months. If the proposed combination falls apart, SolarCity, with $3.35 billion in debt, may struggle to survive. Musk, both companies’ largest shareholder, would face not only personal financial pain but also new questions about his vision for revolutionizing the way America powers its homes, cars and factories. And if investors lose confidence, Tesla might not be able to raise the capital it needs to develop and produce its lower-priced Model 3 sedans.

SolarCity’s value falling faster than Tesla’s — as it has today — could be an indication that more investors think the deal could fall apart, said Ross Gerber, co-founder and CEO of Gerber Kawasaki Wealth & Investment Management. Wednesday’s filing showed that there were no other bidders with a real offer and that SolarCity is having trouble raising cash. Without Tesla, there is no savior, he said.

“It just shows a lack of faith in deal completion,” he said in a telephone interview. “We were offered SolarCity bonds and passed and we’ve sold 40 percent of our Tesla holdings in recent months. If guys like me won’t give Elon capital, no one will, because I’m a fan.”

Tesla on Sept. 1 fell 4.3 percent to $202.99 at 12:37 p.m. New York time. It earlier dropped as much as 5.4 percent, the biggest intraday drop since the 11 percent plunge on June 22, the first trading day after the SolarCity acquisition announcement. SolarCity fell 7.5 percent to $19.12. Its shares had dropped as much as 8.4 percent, the most since May. Entrepreneur Musk is the chairman and largest investor in both companies as well as chief executive officer of Tesla.

‘Material Issue’

The preliminary proxy for the all-stock SolarCity acquisition showed the cash burn that Tesla would have to manage. It also showed that Tesla had considered making a merger proposal to SolarCity before the carmaker’s May stock offering of $1.4 billion and the announcement in June that intended to buy the company.

“That is a material issue that should have been disclosed,” Gerber said in an e-mail. “It’s a mess over there. Elon is killing his dream.”

Gerber said his firm has been selling some of its Tesla shares since the merger was announced because the cash burn may be too much if the companies are combined.

“The cash burn is pretty severe and the timeline of events speaks to the company’s credibility,” said Brian Johnson, an analyst at Barclays. “And banks don’t seem to have the checkbook out.”

SpaceX Crash

Colin Rusch, an analyst at Oppenheimer & Co., added that an explosion of a SpaceX rocket at Cape Canaveral, Florida, may also be feeding into the sell-off. Musk is the biggest investor in closely held Space Exploration Technologies Corp.

“We believe SCTY needs the acquisition to close as soon as possible noting that liquidity concerns have been on investors’ minds since 2H:15 as the company completed smaller than expect ABS transactions,” he said. “We continue to be very skeptical of this deal as a prudent investment of TSLA resources but do expect it to close given the extent of mutual shareholders.”

©2016 Bloomberg News

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