SolarCity Corp (NASDAQ:SCTY) could be bailed out by Tesla Motors Inc (NASDAQ:TSLA). It was reported that the struggling Elon Musk-backed solar firm could be rescued by the Elon Musk-owned electric car giant. Despite the benefits for the solar firm, SolarCity shares have paired some of its gains earlier in Wednesday’s trading session, while Tesla shares are cratering.
SolarCity Corp Pares Wednesday’s Gains
Year-to-date, SolarCity shares have lost close to 60 percent of their value. The solar firm has had trouble with sales and falling solar panel prices. At the same time, SolarCity is still trying to combat low oil prices. When you add changing state legislation to solar power policy to the mix then you have a struggling company.
A lot of people were stunned late Tuesday when it was reported that Musk’s Tesla Motors offered to acquire SolarCity for an all-stock deal with $2.8 billion. Musk noted that it was a “no-brainer” because it would shave off marketing and sales costs, and potentially help attract new customers.
“We believe that our proposal offers fair and compelling value for SolarCity and its stockholders, while also giving SolarCity’s stockholders the opportunity to receive TSLA common stock at a premium exchange ratio and the opportunity to participate in the success of the combined company through their ongoing ownership of TSLA stock,” the electric car firm said in a statement.
There is also one clear merger that Musk wants to complete: SolarCity’s solar panels and the Tesla Powerwall home battery system.
“It’s now time to complete the picture. Tesla customers can drive clean cars and they can use our battery packs to help consume energy more efficiently, but they still need access to the most sustainable energy source that’s available: the sun,” the statement read.
On paper, this sounds like a splendid idea, but then you look at Wall Street and a lot of investors and analysts aren’t too happy about the proposal so far.
SolarCity Corp Investors Aren’t Ecstatic
Tesla shares fell 13 percent in after-hours trading. During Wednesday’s trading session, Tesla shares dipped to under $200 a share by losing as much as nine percent. SolarCity soared in after-hours trading by about 20 percent. It also started the day off strong, up close to six percent, before paring some of those gains – it’s trading at just over $22 a share.
Essentially, investors continue to dump shares because they doubt Musk can integrate the electric-car and solar-energy firms he backs. Some have even gone as far as calling the proposed combination as “shameful.”
High-profile investment manager Jim Chanos told CNBC that the “brazen Tesla bailout of SolarCity” is a “shameful example of corporate governance at its worst.”
“SolarCity, whose bonds were yielding 20 percent yesterday, is a company headed toward financial distress,” said Chanos. “It is burning hundreds of millions in cash every quarter, a burden that now Tesla shareholders will have to bear, at a total cost of over $8 billion,”
Chanos added that it’s difficult to believe that Musk didn’t think of this deal when he recently sold shares in Tesla.
It has been well-known that Chanos is a staunch critic of the Musk companies. He has shorted both firms, warning that SolarCity is a subprime group in the solar industry.