17% Immediate Upside for SCTY Stock
The market had dual reactions to Tesla Motors Inc’s (NASDAQ:TSLA) offer to buy SolarCity Corp (NASDAQ:SCTY) this week—bullishness for SCTY stock and deep skepticism for TSLA stock. Those reactions were pretty much universal. However, both sentiments were counteracted in the days that followed.
The gains on SolarCity stock’s share price tapered and the losses were minimized on TSLA stock. Investors seemed to have realized that Tesla had only made an offer. The deal wasn’t, as the song goes, signed, sealed, and delivered.
SolarCity’s board members still had to approve the deal. The company only just selected a special committee, in its words, “to evaluate SolarCity’s long-term business plan and stand-alone opportunities for value creation against a broad range of strategic alternatives.” (Source: “SolarCity Announces Formation of Special Committee to Evaluate Tesla Proposal,” SolarCity Corp, June 27, 2016.)
Translation: “We picked some people who are perceived as independent to evaluate this Tesla deal.”
This special committee hired outside legal and financial counsel, but they are still technically SolarCity board members. They know what the company has been through in the last few years, including falling stock prices, regulatory hurdles, and increasing losses.
It hasn’t been a pretty picture, that is, unless you understand the long-term vision of the company. SolarCity has an immaculate long-term plan, but it is vulnerable to sudden movements in interest rates or a change in solar energy tax credits.
On the other hand, Tesla’s offer is an instant windfall for SolarCity’s shareholders.
They are offering stock, rather than cash, as compensation. The conversion rate values each SCTY stock at between $26.50 and $28.50, which is up to 17% higher than the stock’s current price at the time of this writing. It’s a no-brainer for the special committee.
Tesla’s offer gives SCTY stockholders an immediate benefit, while the future without Tesla is uncertain (at best). It’s basic math, really. SolarCity is trading below the buyout price, even though a buyout is the overwhelmingly obvious endgame here.
I can only imagine one conceivable objection to this kind of takeover. Let’s say Tesla offered to buy SolarCity, but SCTY stockholders were worried they would discontinue operations. Maybe they just want some proprietary technology.
That would be a reasonable basis for refusing the offer, but no one is proposing anything close to that. Tesla doesn’t want to close SolarCity; it wants to rebrand the company as “Tesla Solar” because Elon Musk wants to build the ultimate green technology company.
From my vantage point, as a close observer of SolarCity, it looks like the special committee has to endorse Tesla’s offer. They have a fiduciary obligation to shareholders. It’s their job to make sure investors get the best deal possible and in this case, that means accepting Tesla’s offer. Regardless of what the deal means for the future of TSLA stock, it is undeniably good for SCTY stockholders.
The bottom line is that Tesla put a price range on the buyout. Since SolarCity’s shares are trading below that price, it only stands to reason they will surge once the buyout becomes a reality. That is why I’m bullish on SCTY stock—plain and simple.