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Tesla And SolarCity Give Investors Proposed Merger Details

At Long Last, Details Emerge For Tesla TSLA-SolarCity SCTY's Proposed Merger

David Tamberrino of Goldman Sachs offered his take on Tesla Motors Inc TSLA 0.31%'s conference call on Tuesday to better explain the rational behind its proposed acquisition of SolarCity Corp SCTY 1.94%.

Cash Flow

The acquisition of SolarCity is expected to add $500 million of cash to Tesla's balance sheet over the next three years, but the analyst pointed out this refers to total cash flow, not the standard free cash flow.

Tamberrino's own estimates peg SolarCity to break even on a total cash flow over the next three years.

Product Shift

Tamberrino noted that SolarCity is aggressively transitioning its product mix, as 30 percent of September's bookings were represented by cash/loan sales versus less than 10 percent in the first quarter.

Given this shift, management believes SolarCity could reach $1 billion of revenue in 2017 (versus the analyst's current estimate of $840 million), which is "achievable" but only if a 30 percent mix holds.

Synergies

Tamberrino believes new commentary on cost synergies was "lacking" and a prior goal of achieving $150 million of cost synergies in year one was reiterated.

Moreover, the analyst remains "more guarded than management" on revenue synergies as not all customers will be interested in buying all three products (car, solar, battery) that a joint Tesla–SolarCity entity will sale.

Capital Needs

Tesla reiterated its position that it does not need to raise capital in the near term but will keep an eye on the market.

Technology

Tamberrino pointed out commentary from the conference call suggested technology from Panasonic and Silevo, a solar panel manufacturer SolarCity acquired in 2014, would be employed at the company's factory in Buffalo, New York.

In addition, management expects to meet the $5 billion spending and 1,500 job requirement which is required as part of a $750 million facility from the state of New York.

At last check, SolarCity was down 0.84 percent at $18.91, while Tesla was down 0.55 percent, trading at $189.75.

DateFirmActionFromTo
Oct 2016Axiom CapitalUpgradesSellHold
Aug 2016BairdDowngradesOutperformNeutral
Aug 2016Raymond JamesDowngradesStrong BuyMarket Perform

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