June 24th, 2016
On Tuesday, Tesla’s Board of Directors submitted a stock-swap offer to SolarCity CEO Lyndon Rive that would result in a Tesla takeover of the solar company. The resulting outcry among members of the finance community was difficult to avoid in every corner of the web this week, with one person calling the move “a shameful example of corporate governance at its worst.”
People are saying Tesla is “bailing out” the embattled SolarCity, which—to be fair—has had the unfortunate problem of losing millions of dollars per quarter for a while now. But many of these same people who are calling the companies out have taken “short” positions on one or both, meaning they win if the stocks lose value. Still, their concerns are worth listening to.
Ever the salesman, Tesla CEO and SolarCity Board Chairman Elon Musk is hyping the deal in the most ostentatious way possible, saying the combined company could someday have a market capitalization of $1 trillion, which would make it the biggest publicly-held company of all time.
But we couldn’t care less about what happens to billionaires and the deals that could put billions more into their pockets. We’re more interested in what might happen to the little guys and gals, like people who signed a SolarCity Power-Purchase Agreement (PPA) a couple years back, We want to make sure they don’t get screwed in the deal.
What this deal means for past and future customers of both companies
A little over a year ago, Tesla announced its Powerwall home battery system, and SolarCity was quick to offer the storage solution to its customers. At the time, we asked the question What if SolarCity starts leasing home solar with Powerwalls and becomes your new electric company?
Well it looks like we might get an answer to that question, but not exactly how we thought. If this deal goes through, it will be Tesla Energy who’ll be selling you solar+batteries, and maybe even a car too. But what if you’re already a customer?
For current SolarCity customers
If the deal is approved by the shareholders of both companies, it’s a good thing for you. SolarCity was (and is) reportedly at risk of going bankrupt, which probably wouldn’t have had much effect on you, but this kind of merger is better and the results are easier to predict.
The good news is, if you signed a PPA or got a loan to buy panels with SolarCity, your deal probably isn’t going to change much. The standard SolarCity PPA contract makes immediate mention of the company’s “successors and assigns” and their responsibility to carry out the obligations set forth in the agreement. The contract goes on to say SolarCity’s production and maintenance warranty will be transferred “to a party professionally and financially qualified to perform such obligation.” Whew.
And anyway, the contract also allows PPA customers to buy the system at a third-party-assessed “Fair Market Value” on the 5th (and each subsequent) anniversary, or at any time after if they sell the home or if SolarCity ever ceases operations. It’s unclear whether being taken over by a car company counts as “ceasing operations,” but the Fair Market Value will probably end up being worth it. Just make sure you cover all the bases and talk to your attorney and accountant before deciding to buy.
For current Tesla customers
If you own a Tesla, expect to be offered solar panels soon after the deal goes through, probably with a pretty nice discount for being a customer. This can be a very good thing for you, but we’d suggest you steer clear of the PPA option, and look at SolarCity’s new loan offerings, which at 2.99% APR can help you get into solar without much money down, while still allowing you to reap the huge financial benefits of the 30% federal solar tax credit and any state solar incentives you can find.
And there’s nothing like paying for an income-generating asset over a long period where it’s actually generating income, which is basically what a solar loan allows you to do.
The big takeaway: will the merger be successful?
Here’s where we think this story gets interesting. States around the country are doing away with net metering, which means people with solar panels don’t want to be sending any of that electricity back to the grid, because they’ll get paid peanuts for it. If you already have solar panels in a place where net metering has ended, owning an electric car becomes a good way to ensure you’re using all that solar energy instead of selling it at the utility’s avoided cost rate.
If the merger goes through, the new mega-Tesla will sell panels and batteries bundled together as cheaply as anyone else, likely making the company’s products attractive even in places where solar hasn’t done well in the past. Electricity is still expensive, after all, and solar prices are cheaper than ever, so there will be plenty of market for a company that can replace an expensive-to-run, dirty thing (car) with an affordable-to-run, clean thing (electric car powered by solar).
The first big hurdle here is getting Tesla investors to vote to approve the deal. The next hurdle is absorbing SolarCity and all its debt while turning the whole thing into a lean, competitive company. If they can do that, they might hit that $1 trillion market cap number. If not, the billionaires stand to lose a bunch of money, but at least current customers will be okay.
Disclosure: The author owns a small amount of SolarCity stock.
Disclaimer: The “advice” given in the above column is for informational purposes only and should not be acted upon without further consultations with your lawyer, your accountant, your spouse, your priest, or any combination of the preceding.
Disaster: Kids these days don’t know from disaster. Now, take Mount Vesuvius in AD 79. THAT was a disaster.
Diz Busters: No you don’t want to know what that is.
Last modified: March 4, 2019