Don’t Give Up on SCTY Stock
The investment gods haven’t smiled on SolarCity Corp (NASDAQ:SCTY) in a long time, but Tesla Motors Inc’s (NASDAQ:TSLA) buyout offer could turn things around. In fact, I expect we’ll see a surge in SCTY stock very soon. There’s just one roadblock left…
That one roadblock is the approval of the buyout from SolarCity’s board of directors. The company is stuck in purgatory until the board votes on that deal, but they can’t vote until they hear from the special committee appointed to review the offer. Oddly enough, there’s no deadline for when the special committee needs to wrap things up.
I suppose if there were a deadline, SCTY stock would grow volatile ahead of the announcement. Maybe it’s for the best, then, if the market hears about SolarCity’s decision after the fact. Nonetheless, I expect the board to say “yes” and I expect SCTY stock to surge in the aftermath.
SolarCity stock is trading at a discount to the acquisition price listed in Tesla’s offer.
To me, that is an open-and-shut case. Any concerns about this buyout are stacked on Tesla’s side of the deal, meaning there’s very little downside for SolarCity.
This is a great deal for SolarCity. Tesla brings with it a lower cost of capital, an immense amount of brand recognition, and potential savings on sales and marketing costs. By dissolving into Tesla, SolarCity would significantly advance its outlook.
The solar power company’s biggest problem was drawing in customers. It took a lot of cash to target the right people and educate them about rooftop solar. But people who buy Tesla vehicles are also people who care about renewable energy.
Tesla said as much in its announcement of the offer: “Because of the shared ideals of the companies and our customers, those who are interested in buying Tesla vehicles or Powerwalls are naturally interested in going solar,” the company said. (Source: “Tesla Makes Offer to Acquire SolarCity,” Tesla Motors Inc, June 21, 2016.)
The fact is that there are undeniable overlaps between the two companies.
However, it is possible to argue that Tesla’s shareholders are getting the raw end of the deal. The company would be taking on SolarCity’s debt and cash burn at a time when it’s ramping up to meet its 2018 deadline of 500,000 cars.
You can argue that perhaps Tesla should stay focused on that goal rather than trying to expand. Considering its existing burn rate, that’s a reasonable point, but only insofar as it applies to Tesla. SolarCity’s board should have no doubts.
The deal already got the green light from Tesla’s board, so I think this is actually going to happen. Judging from the high end of the buyout price, SCTY stock still has 19.8% to the upside—and that’s in the immediate term.