SolarCity accepts Tesla's $2.6 billion offer; both shares fall

SolarCity Corp agreed to Tesla Motors Inc’s (TSLA.O) $2.6 billion offer to buy the solar panel installer, the companies said on Monday, clearing one obstacle in the way of Elon Musk’s ambitious plans for a carbon-free energy and transportation company.

Tesla’s offer represented about half of SolarCity’s value a year ago, a tumble reflecting the solar company’s slowing growth, complex financial structure and the increased scrutiny of government incentives for rooftop solar.

For Tesla, acquiring SolarCity offers the promise of greater economies of scale in electrical energy management systems, battery production and marketing, tempered by the near-term challenge of managing a high-risk ramp-up of vehicle production and a merger simultaneously.

Standard & Poors said on Monday it put Tesla’s credit ratings on CreditWatch with negative implications “to reflect the significant risks related to the sustainability of the company’s capital structure following the proposed transaction.”

Tesla’s stock swap offer valued SolarCity at $25.37 a share, or $200 million less than the initial proposal Musk outlined in June, before advisers to the companies had done due diligence.

SolarCity shares shed 7.4 per cent on Monday to close at $24.72, a level that suggests most shareholders are betting the deal will be approved. Tesla shares closed down 2 percent at $230.01.

The company on Monday cut its forecast for full-year installations by 10 percent from prior guidance. In 2017, SolarCity said it expects improvement driven by integrated battery storage offerings and “a new solar product focused on the 5 million new roofs installed each year in the U.S.”

SolarCity has come under pressure from rivals offering low-cost solar energy from large, utility-scale installations, and because some state governments have reined in subsidies that encouraged rooftop solar.

“SolarCity’s cost of capital is higher than the individual in most cases,” Musk said on a call Monday, adding SolarCity could focus on selling systems to homeowners, financed through their mortgages.

Tesla shares also dipped, as Musk repeated that if the deal is consummated, the combined Tesla-SolarCity could require a “small equity capital raise” next year. Until Friday’s close, Tesla shares were up 7 percent since the company first announced its proposal. Tesla said in a regulatory filing it would issue shares as part of the transaction.

Musk, chairman of both Tesla and SolarCity, said a capital increase could be a “low to mid single digit” percentage of Tesla’s market capitalization, which on Monday was about $34 billion.

Both companies have been burning through cash, although they have projected achieving positive cash flow later this year. SolarCity Chief Executive Officer Lyndon Rive, who is Musk’s cousin, repeated that forecast during a conference call on Monday.