Elon Musk sees $1 trillion Tesla as shares drop over SolarCity deal

Some of Tesla Motor Inc's biggest investors have signalled support for CEO Elon Musk's plan to buy solar power company SolarCity Corp, although the electric car maker's stock cratered on Wednesday, lopping more than the $2.8 billion US value of the proposed deal off Tesla's market capitalization.
Tesla CEO Elon Musk, who is also chairman and a major shareholder in SolarCity, unveiled an updated "master plan" last month in which he sketched out a vision of an integrated carbon-free energy enterprise, offering electric vehicles, car sharing and solar energy systems. (Francois Mori/Associated Press)

Some of Tesla Motor Inc's biggest investors have signalled support for CEO Elon Musk's plan to buy solar power company SolarCity Corp, although the electric car maker's stock cratered on Wednesday, lopping more than the $2.8 billion US value of the proposed deal off Tesla's market capitalization.

"It's a natural evolution of their mission to transform transportation into a sustainable business," said Joe Dennison, a portfolio manager of Zevenbergen Capital Investments, which has about 600,000 Tesla shares, or about 0.4 per cent of shares outstanding.

It is still early in the process, he said, but "We expect it to go through and believe that most investors who actually own the stock understand management's long-term vision for the company."

That was not the market's broad reaction, sending Tesla's shares down more than 10 per cent, and taking more than $3 billion US off its market value, which now stands around $28.7 billion US.

That was a blow to Musk, who is chief executive of Tesla, chair of SolarCity and the biggest shareholder in both companies. He is also the CEO of rocket-maker SpaceX.

He and Tesla management risk being distracted from rolling out the new Model 3 sedan, a mass-market electric vehicle key to the success of the young firm, analysts said, questioning whether merging two companies which both need substantial cash was a good idea.

The audacious entrepreneur envisions a one-stop shop for clean-energy fans, who could buy an electric car, home solar system and battery backup in a single visit. Some argued the two firms cater to different groups of customers, with little crossover.

Shares of the much smaller SolarCity rose more than three per cent, valuing the U.S. market leader in residential rooftop solar panels at $2.15 billion US.

Plans in the pipeline

In a hastily arranged call with investors and Wall Street analysts early on Wednesday, where Tesla executives defended the deal, Musk said institutional shareholders had some idea of the plan.

He had not disclosed the deal, he said, but over the years, "this idea has been bandied about with some of our largest shareholders, institutional shareholders. Yeah, there have been discussions."

The manager of the second largest mutual fund investor in Tesla, the $12 billion Fidelity OTC Portfolio, which is also the largest institutional holder of SolarCity, praised a tie-up in comments earlier this year.

A SolarCity vehicle is seen on the road in San Diego, Calif., on June 22, 2016. Tesla and SolarCity said on Monday that SolarCity stockholders would receive 0.110 Tesla common shares for every share held. (Mike Blake/Reuters)

"We remain fans not just of Tesla products, but of the concepts and potential future partnerships behind the company. We foresee fruitful synergies between say, Tesla and SolarCity — or any company that can benefit from superior battery technology," Gavin Baker, who runs the Fidelity OTC fund, said in his first-quarter commentary for investors. It owns 2.1 per cent of shares.

Baker and Will Danoff, who runs the $100 billion-plus Fidelity Contrafund, the largest mutual fund investor in Tesla with 3.5 per cent of stock, have both told Reuters in interviews that they tend to give more leeway to founder-run companies which they believe are still in the early stages of growth.

Musk, a founder of Tesla and SolarCity who owns about a fifth of each, will recuse himself from board and shareholder votes, leaving the fate of the deal in the hands of outside investors, led by major fund companies such as Fidelity Investments.

Musk himself said that Tesla could be a trillion-dollar company one day, despite its current market value being less than three per cent of that figure.

"I have no doubt about this — zero," Musk said on the call with analysts and investors before markets opened on Wednesday.

"We should have done it sooner."

Lost golden touch?

The quiet support was drowned out by criticism as the stock fell.

"This deal feels like [Musk] has lost his Midas touch. I also feel like Musk is trying to do too much," said well-known investor Jeffrey Gundlach, chief executive at DoubleLine Capital, which does not hold Tesla shares.

Investors who short Tesla, betting that shares will fall, pointed to the conflict of interest and raised financial concerns about uniting two money-losing companies which both regularly raise cash to support their expansion.

"When a company's executives misunderstand modern corporate finance and technology strategy, they can make profound miscalculations and errors of judgment," Salome Gvaramia, chief operating officer of Devonshire Capital, which has a short position in Tesla, said in a statement.

SolarCity shares have fallen more than 50 per cent this year in a highly competitive market, fanning criticism that a Tesla deal was meant to save SolarCity.

Some analysts noted that SpaceX has bought SolarCity bonds, giving it and Musk incentive to support SolarCity.

Short-seller Jim Chanos of Kynikos Associates blasted Tesla's proposed acquisition of SolarCity, describing it in a statement as a "brazen" bailout" and "shameful example of corporate governance at its worst."

Musk said SolarCity would post positive cash flow in the next three to six months and would not have a material impact on Tesla's future cash needs or expectation to be cash-flow positive by year-end. Costs for both companies would go down significantly after the merger, he said, without giving specifics.

Share lending data suggested short sellers were increasing their bets against both companies. Interest rates to borrow Tesla shares rose to 5 per cent on Wednesday from 1.5 per cent early in the day, according to S3 Partners, a financial analytics firm. Hardly any SolarCity shares were available for borrowing.