Tesla – SolarCity Merger Financials

Background:

This financial analysis and recommendation is issued by the LIUNA Corporate Affairs Department. LIUNA sponsored retirement funds have in excess of $40 Billion invested on behalf of participating members and retirees.

LIUNA Funds are long-term investors.  Studies have established that good governance, strong independent Boards of Directors and positive stakeholder relationships are predictors of better long-term performance. In order to best guarantee the long-term success of investments, LIUNA is a strong advocate for such policies.

LIUNA's opposition to the current proposed takeover of SolarCity by Tesla does is based on our judgement that there are serious long-term challenges facing both companies. Challenges that are more likely exacerbated rather than solved by the proposed merger. 

We believe that there are two critical “red-flags” that argue against the current proposal:

Tesla and SolarCity have interlocking Boards of Directors. The lack of independence of the Boards are indicators of broader governance issues. Any merger or take-over proposals cannot be properly evaluated by the current Boards or their sub-committee. These issues are addressed in further depth elsewhere.

Both companies have performance, cash, and long-term debt issues that should be of great concern to all investors. While both companies face serious challenges, we worry particularly about potential negative consequences on Tesla at a time of serious market pressures.
SolarCity’s staggering long-term debt, growing losses and cash flow negatives are reflected in a sagging share price (down over 60% over two years). We believe that an attempt to take-over SolarCity at this time will create integration problems and distractions to Tesla that far outweigh any perceived benefit.

Tesla’s focus at this time should be delivering on promised increased production schedules, the successful launch of Model 3, correction of recently publicized “Autopilot” failures, increased competition and a new focus on good governance starting with a restructuring of the Board of Directors that guarantees independence from management and minimizes conflicted relationships with SolarCity.

Executive Summary:

Dropping Share Price – Over the past year, share prices dropped 24.7% at Tesla and 52.5% at Solar City as of August 5,2016.

Stock Performance:

YTD

1 Year

2 Year

TSLA

(4.12%)

(5.18%)

(8.87%)

SCTY

(55.61%)

(53.71%)

(68.02%)

 

Earnings Per Share:

YTD

1 Year

2 Year

TSLA

($2.127)

($2.443)  

1.34%   

SCTY

($.255)

($.047)

($.037)

Return on Investment and Return on Earnings Underperforms – Both Tesla and SolarCity continue negative ROI and negative ROE. According to Reuters, both companies underperform as compared to their industry and sector.

ROI (Return on Investment):

Company

Industry

Sector

TSLA

($20.47)

$9.43

$9.17 (Reuters)

SCTY

($18.75)

$15.39

$5.43

 

ROI (Return on Investment):

Company

Industry

Sector

TSLA

($113.20)

$12.76

$12.19 (Reuters)

SCTY

($7.54)

$14.37

$7.97

Net Losses Increase – Net losses for Tesla tripled from fiscal year 2014 to 2015 and doubled for SolarCity in the same time period. The loss ratio increased again for Q1, 2016.

Profit (Loss): (Thousands)

12/31/15

12/31/14

12/31/13

TSLA

(888,663)

(294,040)

(74,014)8 (10K)

SCTY

(768,822)

(375,230)

(151,758)9 (10K)

 

Profit (Loss) - (Q1 – 2016)

3/31/16

3/31/15

  
TSLA

(282,267)

(154,181)

Loss Increase - 83%10 (10Q)
SCTY

(283,105)

(146,937)

Loss Increase - 92%11

Burning Through Cash – Over the past year, SolarCity has a negative cash flow of $2.6 Billion, while Tesla went through $2.2 Billion. Total negative cash flow for the combined companies would have been nearly $5 Billion.

Cash (Net Increase (Decrease)

(Thousands)

12/31/15

12/31/14

12/31/13

TSLA

(708,805)

1,059,804

643,999*12

SCTY

(121,839)

(72,697)

417,000*13

Long-Term Debt to Equity Increases – Total long-term debt for the two companies increased over $1.6 Billion in one year alone (Q1 2015 to Q1 2016). Long-term debt to equity ratios also increase for both companies.

Long-Term Debt to Equity:

(Millions)

3/31/16

3/31/15
 

Debt

Equity

Ratio

Debt

Equity

Ratio

TSLA14

$2,526.95

$970.37

2.6

$1,942.95

$825

2.35

SCTY15

$2,730.37

$885.88

3.08

$1,664.41

$752.22

2.21

Interlocking Loans and Bond Purchases Increase Risk – The largest buyer of SolarCity’s “solar bonds” was Musk controlled SpaceX. In addition, Mr. Musk also took out $475 million in personal credit lines, buying shares of SolarCity and Tesla when they needed capital according to SEC filings. According to the Wall Street Journal, “Few top executives use their shares as collateral for personal loans because it can be risky to other shareholders and also raises concerns that the executive’s personal interests could conflict with the company’s interests.

Interlocking Debt:

Investors must be concerned with the interlocking relationships and economic dependency of the Elon Musk’s three major enterprises (Tesla, SolarCity and SpaceX). According to the WSJ, “Since October 2014, SolarCity Corp. has tried to lure individual investors to the solar-power business by pitching $214 million of what it calls “solar bonds” through the company’s website. The biggest buyer by far, though, was rocket maker Space Exploration Technologies Inc., including $90 million of $105 million sold last month.”

Mr. Musk also took out $475 million in personal credit lines, buying shares of SolarCity and Tesla when they needed capital according to SEC filings. According to the Wall Street Journal, “Few top executives use their shares as collateral for personal loans because it can be risky to other shareholders and also raises concerns that the executive’s personal interests could conflict with the company’s interests. If the stock price slides, that could trigger a margin call requiring the executive to sell the shares or put up more collateral to repay the loan. In securities filings, Tesla has disclosed the possibility of margin calls related to Mr. Musk’s loans, which it said “may cause the price of our common stock to decline further.”

 

SolarCity – 2 Year Performance – down 60.68% (July 15, 2016)

http://www.nasdaq.com/symbol/scty/stock-chart#ixzz4EgDmP0Wr

alt tag

None of these financial warning signs taken by themselves would necessarily be predictors of long-term success or failure. However, Tesla faces mounting pressures – execution of ramped up production schedules , recent “Autopilot” failures , and increasing competition . Taken together, and in combination with mounting challenges, we conclude that shareholders should oppose this proposed merger.