Independent board members have approved Tesla's bid to acquire SolarCity in an all-stock transaction worth $2.6 billion.
The Tesla-SolarCity merger document contains some bombshells for watchers of this industry and these two firms in particular. There's the issue of a mammoth accounting mistake, the "go-shop" period, debt loads, and the conundrum we're focusing on here -- an unidentified acquirer that considered buying SolarCity, but ultimately opted not to.
According to the SEC filing:
- "Between June 21, 2016 and SolarCity’s ultimate acceptance of Tesla’s offer, representatives of Lazard contacted six potential strategic counterparties (including Parties A and B) about a possible acquisition of SolarCity, one potential financial counterparty (Party C) about a possible acquisition of or equity investment in SolarCity, six additional financial counterparties about a possible equity investment in SolarCity, and received unsolicited inquiries from two potential financial counterparties about a possible equity investment in SolarCity."
- "On July 7, 2016 representatives of Skadden provided representatives of Party B a draft non-disclosure agreement in advance of the upcoming management meetings between SolarCity and Party B."
- "The Special Committee further discussed the advisability of a “go-shop” provision and also discussed with its advisors and SolarCity management the timing of a possible transaction with Party B and various standalone alternative measures to generate additional near-term liquidity for SolarCity."
- "Representatives of Lazard further reported that Party C did not wish to acquire SolarCity at this time, but indicated a possible interest in participating in an equity investment transaction."
- "Representatives of Lazard informed the Special Committee that Party B had determined not to proceed with a transaction with SolarCity for a variety of reasons, including regulatory issues unique to Party B and that Party B did not believe that it was in a position to make an acquisition proposal within the range of Tesla’s original proposal."
Not much to go on in order to suss out the mystery company's identity, with the exception of the "regulatory issues unique to Party B."
Using proprietary GTM modeling software and narrow AI to guide my survey methodologies (i.e., I emailed the GTM Research solar and storage analysts), we came up with this list.
- "I'll throw Google out there. It paid $600 million more for Nest, so why not $2.6 billion for SolarCity? There's a home energy, data, connected-home angle to see if you tilt your head the right way."
- "From wholesale to retail solar via Apple Energy."
- Several votes were tallied for "some PE firm."
- "180-degree pivot on DG solar via Berkshire Hathaway"
- "My money's on Google (well, technically Alphabet), but I like the Berkshire Hathaway idea too."
- "NextEra, Duke, EDF, Engie, Edison or some other deregulated energy company/affiliate (Duke and Edison are less likely with their existing positions in C&I solar firms)."
- "I'm sure all the major renewable IPPs have considered it, but didn't touch it because of the market valuation and losses."
- "I'd take a flyer on Amazon."
- "To be honest, the more I think about the Amazon flyer, the less ridiculous I think it is. Amazon is great at losing money. I mean just the best at it. The company did it for so long. Never stopped them. SCTY loses money because they're an operational beast. Truck fleets, warehousing, sales, service and operations centers spread among all of the states they operate in. Who better to streamline operations than what essentially is the world's largest logistics company? They could maybe bring the idea of profit back into the discussion. Maybe."
- The "(potential future) Virgin Energy."
- "Or, to throw this is in a totally different direction -- Comcast"
Some other revelations from the S-4:
$400 million "computational error"
RW Baird reports, "The investment bank that advised SolarCity on its $2.6B sale to Tesla made a 'computational error' in its analysis that discounted the value of the solar company by $400M, according to a new regulatory filing. Despite the mistake by Lazard, the companies agreed it would not change their view of the deal."
The S-4 notes, "On August 18, 2016, Lazard became aware of a computational error, which double-counted certain amounts of SolarCity’s projected outstanding indebtedness, in certain SolarCity spreadsheets setting forth SolarCity’s financial information that Lazard used in its discounted cash flow valuation analyses," adding, "Representatives of Lazard reviewed with the Special Committee and the SolarCity board, respectively, its recalculated discounted cash flow analyses as of July 29, 2016, and the differences in Lazard’s discounted cash flow analyses that resulted from the computational error described above."
Better shop around
SolarCity has until September 14 to actively seek other acquisition proposals, at which time its "go-shop period" ends. RW Baird remains "confident that a better offer will not materialize, and that the merger will go through."
Future capital needs of the combined company
"Tesla is currently planning to raise additional funds by the end of this year, including through potential equity or debt offerings, subject to market conditions and recognizing that Tesla cannot be certain that additional funds would be available to it on favorable terms or at all. Such additional funds would be used primarily for tooling, production equipment and construction of the Tesla’s Model 3 production lines, equipment to support cell production at Tesla’s Gigafactory, as well as new Tesla retail locations, service centers and Supercharger locations. Secondarily, if the Merger with SolarCity is completed, the additional funds would also be used to support the additional capital needs of the Combined Company."
"As of June 30, 2016, Tesla’s consolidated indebtedness was approximately $3.7 billion, and SolarCity’s consolidated indebtedness was approximately $3.3 billion. If the Merger is completed, Tesla expects to incur and assume most of the consolidated indebtedness of SolarCity, and the Combined Company may have to incur additional indebtedness in connection with any extinguishment of certain of such debt in connection with the closing of the Merger, as well as for its ongoing business needs."
The web of family and conflicted interests
"Messrs. Elon Musk, SolarCity’s Chairman, and Antonio Gracias, a member of the SolarCity Board, each serve on the Tesla Board. Mr. Elon Musk is also the Chairman and Chief Executive Officer of Tesla. Jeffrey B. Straubel, another member of the SolarCity Board, is Tesla’s Chief Technology Officer. In addition, Messrs. Elon Musk and Kimbal Musk, each of whom serve on the Tesla Board, are each a cousin of Messrs. Lyndon R. Rive, SolarCity’s Co-Founder, Chief Executive Officer and a member of the SolarCity Board, and Peter J. Rive, SolarCity’s Co-Founder, Chief Technology Officer and a member of the SolarCity Board. In addition, Mr. John H. N. Fisher, a member of the SolarCity Board, is a managing director of DFJ. Mr. Stephen T. Jurvetson, another managing director of DFJ, is a director of Tesla. Ms. Nancy E. Pfund, a member of the SolarCity Board and the Special Committee, is a co-owner of DBL Partners. Mr. Ira Ehrenpreis, another co-owner of DBL Partners, is a director of Tesla. Mr. Brad W. Buss, who served as SolarCity’s Chief Financial Officer from August 2014 until February 2016, is a member of the Tesla Board."
Earlier, Musk said, “The whole point of the merger is to get rid of the conflicts of interest."