Elon Musk may have more work to do to convince his own shareholders to go along with the $2.6 billion proposed merger of Tesla Motors Inc. and SolarCity Corp.
Shares in both companies slumped in early trading after Musk — the largest individual shareholder in SolarCity — announced an agreement for Tesla to acquire it for about $300 million less than initially proposed six weeks ago. The revised terms come after criticism from Tesla investors and on the same day the rooftop solar installer lowered its forecast for 2016.
Musk, the largest individual shareholder in SolarCity, has said the combined company would become a clean-energy giant. He will have a couple of months to convince SolarCity shareholders to take the lower offer, and the Tesla chairman will have to reassure his shareholders that the company can afford to carry SolarCity while also coming up with billions of dollars to fund a slew of new vehicles.
“The lower price probably reflects the lower results and forecast” for SolarCity, Jeffrey Osborne, an analyst at Cowen & Co., said in an interview Monday. Additional interest in the company may emerge over the next few weeks from outside of the industry, he said. “The outlook for next year is a little murky.”
Installation rates for SolarCity’s rooftop panels are slowing, and the San Mateo, California-based company lowered its forecast Monday for at least the second time this year. In a separate statement Monday, SolarCity said installations this year will be 900 MW to 1 GW, down from May when it said it expected at least 1 GW.
SolarCity became the biggest U.S. rooftop solar company largely by focusing on growth at the expense of profit, and investing revenue into building more systems. That expansion has been slowing in recent months as regulators imposed barriers to the solar leases that make up most of its business and it made strategic shifts aimed at boosting cash flow.
That’s boosted debt to $3.25 billion, and it’s reported losses in all but three quarters since its 2012 initial public offering. It announced in October plans to slow growth and focus on becoming profitable.
Under the new agreement, SolarCity investors will receive $25.37 a share in Tesla stock, compared with the initial offer of $26.50 to $28.50 when the deal was announced in June, Tesla said in a statement Monday.
Combining the companies will create market opportunities for both, Musk said. “The point of the merger is to remove conflicts of interest,” Musk said on a conference call Monday.
The deal will now go to the shareholders of the companies for approval. Musk, who is chairman and the largest investor in both companies, recused himself from considering whether the deal should be approved by the SolarCity board when he announced the initial bid on June 21. Other SolarCity directors with connections to Tesla and Musk also excluded themselves from voting.
The offer also allows SolarCity to solicit competing takeover offers through Sept. 14. The companies said that combining forces would lead to about $150 million in cost savings in the first year, and that SolarCity would benefit from Tesla’s 190 retail stores.
Market reaction to the revised terms was negative. SolarCity slipped 4.9 percent to $25.38 at 10:43 a.m. in New York. Tesla declined 0.6 percent to $233.39. SolarCity shares were trading above $50 at the start of the year, almost double the price offered by Tesla.
The two companies already share many ties, with several directors associated with Tesla or Musk. His cousin, Lyndon Rive, is the CEO of SolarCity. SolarCity board members Nancy Pfund and Donald Kendall Jr. were chosen to consider Tesla’s bid. Kendall doesn’t have a connection to Tesla. Pfund, a managing partner at the venture capital company DBL Investors, was an early backer of both Tesla and SolarCity and served as an observer on Tesla’s board before its initial public offering.
Evercore advised Tesla, and Wachtell, Lipton, Rosen & Katz was its legal adviser. The financial adviser to the special committee of SolarCity’s board was Lazard Ltd. and its legal adviser was Skadden, Arps, Slate, Meagher & Flom.
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