Chanos Trashes Tesla and SolarCity Merger
Jim Chanos doesn’t hold back. He thinks the merger of Tesla Motors Inc (NASDAQ:TSLA) with SolarCity Corp (NASDAQ:SCTY)—or rather the former’s takeover of the other—is “the height of folly”. Chanos made no secret of the fact that he plans to short the living circuits out of Tesla Motors stock. (Source: “This shows why Tesla-SolarCity is a ‘crazy’ merger, Jim Chanos says,” CNBC, September 13, 2016.)
In wanting to gather two of his babies under the same roof, Elon Musk, the charismatic boss of Tesla, should not have been surprised by Wall Street’s disapproval. Analysts were dismayed as billions of dollars went up in smoke as Tesla stock became more vulnerable after Musk put $ 2.7 billion on the table to buy back the solar energy company SolarCity.
Jim Chanos Is Right about Tesla
I happen to agree, but who am I? Yet some more authoritative personalities in the world of finance have also expressed doubt over the direction of Tesla stock in the wake of the SolarCity deal. But investors might pay attention if one of the princes of short-selling starts to muse about TSLA stock. Indeed, they may even start wondering about the wisdom of heading for the nearest exit sign.
Chanos expects the resulting Tesla/SolarCity entity to burn through $1.0 billion per quarter while maintaining an umbilical cord to the capital markets, arguing that the entire premise of the deal and business model is”just plain uneconomic.” (Source: Ibid.) It appears as if some Tesla shareholders agree, as Tesla lost over four percent in the past five days and over 13% in the past month. SolarCity lost even more: almost 29% in the past month alone.
Chanos found it rather curious that Tesla, based on the filing, did not offer SolarCity financing while the merger is pending. (Source: Ibid). Musk helped found both Tesla and SolarCity (which is run by his cousins) in 2006. Musk also happens to serve as chair of both companies’ boards of directors. All this inter-mingling raises various ethical questions. Those questions may ultimately put speed bumps in the way of the merger, notwithstanding the opinion of shareholders.
Tesla is Taking a Gamble with SolarCity
Chanos has suggested that the SolarCity deal would turn Tesla Motors Inc into a “walking insolvency.” (Source: “Jim Chanos Calls Merged Tesla-SolarCity a ‘Walking Insolvency’,” Bloomberg, September 13, 2016.) Apart from that, what the entire SolarCity merger—more like a takeover, but feel free to call it whatever you want—does best is add confusion to Tesla’s already complex identity.
Musk wants to convince analysts and investors that Tesla Motors Inc is at once a full-fledged automobile manufacturer. He has the middle-class product to prove it: the “Model 3,” scheduled for late 2017 if all goes well. Yet Tesla is also going to become a domestic energy provider with its “Powerwall” batteries and a battery manufacturer.
But the most dangerous aspect of this merger, especially due to its fawning fans, is that “it’s going to save the world.” That’s a red flag. Companies are not out to save the world; they are supposed to make money for their shareholders and do so responsibly, minimizing risk. TSLA stock, meanwhile, has risen to unsustainable heights on the back of greenwashing and 21st-century ideological hyper-environmentalism.
TSLA stock has not risen on actual facts. Tesla has never made a profit since its founding. It purports to produce 500,000 vehicles per year by 2018. This is more than five times the current number of cars built. TSLA thrives in fantasyland; just consider that it has a market cap of over $28.0 billion and makes two car models. One of them is a $100,000.00+ SUV, whose deliveries to customers have faced many impediments since being launched over a year ago.
By comparison, Ford Motor Company (NYSE:F) is worth $47.0 billion and it sold some 6.6 million cars worldwide in 2015 alone, across dozens of models. Ultimately, nobody can blame Jim Chanos, who considers Tesla’s so-called merger with SolarCity more of a “bailout” than a genuine merger deal, and a “shameful example of bad governance of a company.” (Source: “‘Shameful’: Short seller Jim Chanos rips into the Tesla-SolarCity deal,” Business Insider, June 22, 2016.)