SCTY Acquisition Vote

[anticitizen13.7]

Don't forget that this also gets Tesla the personnel for charging installation in the customer home. One stop shopping for all your electric transportation needs.

Yes, from the "big picture" standpoint, this is all about a Tesla Ecosystem for energy. I appreciate the elegance of a fully integrated product and service ecosystem.

Well, this has certainly been a very interesting day. I'm not going to make any decision on yes/no until all the proposal details are written out. It's ironic that this proposed joining of Tesla and SolarCity comes on the very week that the UK votes on Brexit (whether to stay or exit the European Union, for those unaware).

 

[neroden]

I'm of two minds about this. I think Silevo, Zep, and thousands of trained installers nationwide are pretty valuable and could have serious synergies with Tesla. On the other hand, I do not want Tesla to get mixed up in the numerous exotic financial products which SolarCity has entangled itself with.

 

[JenniferQ]

Curious: why do you see this as ironic wrt Brexit?

Yes, from the "big picture" standpoint, this is all about a Tesla Ecosystem for energy. I appreciate the elegance of a fully integrated product and service ecosystem.

Well, this has certainly been a very interesting day. I'm not going to make any decision on yes/no until all the proposal details are written out. It's ironic that this proposed joining of Tesla and SolarCity comes on the very week that the UK votes on Brexit (whether to stay or exit the European Union, for those unaware).

 

[Jack6591]

When will the vote take place?

 

[GoTslaGo]

Curious: why do you see this as ironic wrt Brexit?

Probably because Brexit and TSLA/Solarcity are both forcing their citizens/owners to vote Yes or No.

At least that's how I interpret it.

 

[Yggdrasill]

I'm thinking No.

I can see some benefits, and certainly solar makes sense, but I think Tesla has offered too much money. $15 per share would have been more reasonable.

 

[adiggs]

What would Solar City's value be as a manufacturer of panels and as technology for providing the hardware for a fully integrated storage solution, but no longer a player as installer of home solar? I can see Solar City as the technology components that together with Tesla represents the hardware and software that provides a fully integrated solution for solar installations.

Does the business still make sense of Solar City were to leave the home installation market (but stay in utility scale market), and instead provide that fully integrated hardware to the other installers in the world? Would the other installers want to buy that fully integrated and tested solution?

@neroden's comments about the exotic financial instruments are also part of my concern.

 

[TaoJones]

In time, the integration, less the disturbing business/financial model, will make more sense.

High potential, check.

Higher price than I'd like, check. But it's pretty much set, so that's that, barring intervention.

Buying opportunity for more TSLA shares, check.

Two out of three ain't bad.

 

[mrdoubleb]

To add a bit of what I posted in the Short Term thread:

SolarCity was working on becoming vertically integrated. They are building a solar panel "Gigafactory" in Buffalo, NY. In addition to batteries, what SolarCity lacks is inverters for DC (current that panel generates) to AC (home sockets). Tesla builds inverters for its cars. If SolarCity is folded into Tesla, Tesla has the capacity to build the complete energy generation/storage solution (panels+inverter+battery) and sell that solution too. Right now, things are fragmented with PowerWall being sold by Tesla and SolarCity doing the solar installs and buying inverters from a third party. So the good part, from a product standpoint, is having a complete solution for customers. 1-stop-shop takes care of everything.

Now the hard part: SolarCity's financials are tricky to understand because of their Power Purchase Agreement model (reference: Tax Equity 101: Structures), which is a substantial part of their business model. Looking at Tesla's financials, I can see their path to success. With SolarCity, there are many assumptions and guesses, some related to political items like tax law. In order for Elon to earn my Affirmative vote for this acquisition, he will have to explain in detail how he intends to make SolarCity viable in the long term.

thank you for the post! Exactly how I feel.

 

[hobbes]

The dealership lobby will have zero standing to shut down a Tesla store that sells solar and Powerwall.

I don´t really have a strong opinion on the offer yet, mostly just irritated by the 10% drop. For your argument above - couldn´t they do the same thing with just the power wall + cars? Why is solar the important part? Or does SC already have lot of locations everywhere they can use for Tesla?

 

[182RG]

The dealership lobby will have zero standing to shut down a Tesla store that sells solar and Powerwall. They may be able to prevent active selling of cars, but it will irritate the community when they go into Tesla only to be told 'we can't sell you a car (but go to our website)'.

It gets brick and mortar Tesla stores in every state that has banned Tesla from selling cars, because they can't ban selling solar and Powerwall. It gets the brand out there, it socializes the idea of Tesla in the state (because they can be everywhere), and it totally mucks up the dealership play book that they've been using state by state.

Brilliant. Just brilliant.

So, this play gets Tesla advertising and directs people to a website to buy a car? That can't be delivered to the store? Or serviced at the store? What good is brick and mortar if you still are barred from selling cars. The dealership play book remains unchanged.

Sorry, not seeing any brilliance. What I am seeing is a huge financial / operational distraction for a company. How many factories are now required to be capitalized and brought up to scale?

History will be unkind to this move.

 

[SBenson]

People who are voting in favor, have you ever looked at SCTY's financial statements? Not their slide decks or shareholder letters but actual SEC filings like 10Qs and 10Ks?

How do you think the merged TSLA income statement look like?

Let me clue you in, it will look miserable. SCTY will be a drag on the financials as long as it does PPAs and Leases.

SCTY drops almost every single ER. Now TSLA will inherit that mess.

All this synergy stuff can be done through partnership. The quarterly reports for TSLA are on a cusp of showing profitability. Now that hope is permanently damaged (if the deal goes through).

 

[neroden]

So, the biggest problem with SolarCity is those convoluted finance products.

Some of these are "tax equity financing" structures which are designed to transfer tax deductions to a third party investor. Tesla can probably use the tax deductions directly, which might be sufficient reason to stop creating these overly complicated structures.

Unfortunately, most of these are securitizations simply for the purpose of getting outside capital. I am not at all confident that these are actually long-run profitable because this is banking: it depends on interest rate spreads between the homeowner's interest rate (including any "hidden" interest the homeowner pays by overpricing on the part of SolarCity) and the interest rate of the financing. SolarCity does not disclose its schedule of interest rates on *either* side (homeowner or financier) of those deals. And the durations are mismatched.

With SolarCity probably taking the financing risk and the default risk, this is a dangerous business; it has nothing to do with selling products, it's a banking business. I want Tesla *out* of it, with banks doing the financing directly and taking the risk.

Musk doesn't understand banking. (IIRC, he thought PayPal could replace banks, but he didn't properly understand what it is banks actually *do*, which meant that PayPal had zero chance of replacing banks.) And he made it very clear in the shareholder call that he hasn't been thinking clearly about the financial end of business. Maybe during the due diligence they'll straighten this out, maybe they won't.

But so far the conference call indicates that Tesla board have a blind spot when it comes to the financing business. I hope that changes.

I wish I'd called into the conference call but I wasn't available this morning. I would have had a much, much better question than any of the analysts did: specifically I would have asked them to do a stress test of SCTY's financials based on interest rate changes and one based on default rate changes.

 

[marvinat0rz]

My votes are sharply reduced given that I sold most of my shares AH.

Did you sell your shares in response to the SCTY acquisition offer? Haven't you held TSLA for ages? Was it only the SCTY thing that prompted the sale?

 

[Jonathan Hewitt]

Did you sell your shares in response to the SCTY acquisition offer? Haven't you held TSLA for ages? Was it only the SCTY thing that prompted the sale?

If I wasn't sitting on so many losses I would have, too. I don't blame him

 

[Gerardf]

I'm a 'Yes, oh HELL yes' vote.

I'm predicting that the dealership lobby is having emergency meetings right now, as they have to rethink their playbook in countless states. Yesterday, they could argue that a Tesla store was not set up properly as a dealership. But if Tesla stores are selling solar, Powerwalls, and cars, they've got to rethink strategy. Do you know how much of Tesla bandwidth is taken up with this issue? Massive. They need the brick and mortar stores everywhere. I don't think they can be stopped if this goes through.

This is gonna be so fun.

Interesting angle.
Is what they are doing with Nordstrom not already doing that to some extend ? I assume that will be in all states as well. I want to see how NADA intents to block Nordstrom shops showing a Tesla and people in that store discussing it with customers.

 

[neroden]

Here's the bottom line for me personally: I wish SolarCity had never gotten involved in all those structured financing arrangements.

If Tesla & SolarCity present these two things, then I'll be gung-ho in favor of the merger:
(a) evidence that the existing structured financing arrangements have a sufficiently limited risk profile: few clawback provisions, low need for refinancing; survive stress tests of "2008 style" financial conditions;
and (b) a plan for transitioning future solar panel financing to direct bank loans and bank-financed leases (where banks take on all default risk) the way the car loans work, so that Tesla can get *out* of the confusing financing mess which is on SolarCity's books.

 

[TheTalkingMule]

Here's the bottom line for me personally: I wish SolarCity had never gotten involved in all those structured financing arrangements.

I haven't gone back to count, but I estimate you've made this statement 20+ times on this site over the last 48hrs. Utilizing structured finance to negate paying for 20+ years of energy consumption up front isn't all that mysterious. SCTY's internal financials and debt levels may be tough to decipher, but they are certainty financing their installs at far greater than 100% as of right now. So what's the problem?

If they dumped their door-to-door sales structure, slimmed down a bit and just sold in mature markets(as they became mature) they'd be absurdly profitable. That's simply not the plan. Elon is willing to burn $.55-.91/W in customer acquisition costs(do the math on that) in order to push solar to mainstream as quickly as possible nationwide. Even with all that temporarily holding them down, they're still #1 by far in residential. Granted they're not making any money as of today.....but that's a separate discussion.

 

[neroden]

I haven't gone back to count, but I estimate you've made this statement 20+ times on this site over the last 48hrs. Utilizing structured finance to negate paying for 20+ years of energy consumption up front isn't all that mysterious.

For the consumer, sure. It's sometimes a blow-up-company, go-bankrupt move for the company setting up the structured finance.

SCTY's internal financials and debt levels may be tough to decipher, but they are certainty financing their installs at far greater than 100% as of right now.

No, they aren't. Read the annual report again. The most obvious risk: they've got 3-month "solar bonds" financing solar installs which have 20-year payment streams. That requires frequent and repeated refinancing. I'm not clear on how large this exposure is. There are several other financing schemes which expose them to more esoteric risks.

Go do some basic 101-level research into banking crises before you comment on this again.

If every install (with a 20-year payment stream) were financed with a 20-year non-callable bond, and the interest rate spread between the 20-year bond and the homeowner's payment was positive, there would be nothing to worry about. (It would be even better yet if the installs were financed by equity.) That is not what is happening at SolarCity.

 

[neroden]

Actually, you know what the traditional way to deal with such issues is? Form a bank. Solar City Bank. Then any refinancing crisis can be addressed by *going to the Federal Reserve discount window* for short-term loans. But Solar City is not currently a bank (and neither is Tesla).