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Elon Stands Alone: Investors Dis Tesla Motors (TSLA), SolarCity Merger

Tesla Inc (TSLA)

Elon Musk needs a great deal of money and fast in order to complete his proposed merger of Tesla Motors and SolarCity Corp. A recent securities filing shows that the firm must raise money from investors to push the deal through. Elon Musk practically broke the Internet in June when he announced his plan to have Tesla buy up SolarCity . The proposed merger will to create a tech and energy conglomerate with an interest in EVs, solar energy, and batteries among other things.

Tesla Motors Inc (TSLA) Factory Freemont, California

Interestingly, Elon Musk has not been able to get many people to buy into the vision and most stakeholders consider the merger as a bailout in disguise for SolarCity. The shares of Tesla Motors are down 9.70% in the last one month and the shares of SolarCity are down 22.6% in the same period.

Nobody wants to join Elon Musk in buying SolarCity

On Wednesday, Tesla Motors revealed in an S-4 filing with the SEC that it would pay out $422 million to its bondholders in the third quarter. The filing also reveals that the firm will need to embark on another round of financing in the next couple of months. The main reason behind Tesla’s need for money is that it doesn’t have a strong enough cash position to support the proposed merger.

The SEC filing also suggests that Tesla might have to go it alone to make sure that the SolarCity acquisition becomes a reality. Musk has approached a number of institutional investors with a view to getting them to join in the acquisition of SolarCity. However, as many as 15 institutional investors have refused to buy SolarCity or put some money down for its acquisition.

The filing also shows that Elon Musk would have a hard time convincing investors to go along with him on the SolarCity ride because the financials of the solar energy firm makes it less desirable. To start with, SolarCity has recorded a 65% drop in its cash position in the last one year. As at June 30, SolarCity’s cash had dropped to $146M down from $421M in June 2015.

Despite all the apparent issues with SolarCity, Musk thinks the merger is ““the best way for Tesla to bring an integrated clean energy product to market.” Nonetheless, Gordon Johnson, a managing director at Axiom Capital Management Inc told WSJ that “SolarCity needs emergency funds to keep operating, and without the debt they issued to insiders they wouldn’t be able to cover their working capital.”

Tesla needs help raising money to buy SolarCity

Tesla Motors and SolarCity investors are set to vote on the proposed merger in October but it is apparent that Elon Musk is acting as if the merger is a foregone conclusion. However, Musk cannot print money out of thin air to finance the deal and he needs about $2.4B in order to acquire SolarCity stock at the agreed price of $24.16 per share.

Elon Musk is no stranger to the debt and equity markets but he might find it somewhat hard to find investors brave enough to lend him money to acquire SolarCity. For one, Tesla has a debt-to-equity ratio of 145.5% but SolarCity has a massive debt-to-equity ratio of 375.6%. Part of the filing reads, “Certain lenders appeared to be delaying funding certain financings of SolarCity as a result of the announcement of the Tesla proposal and that SolarCity was unable to access the equity capital markets as it regularly did as a result of the pending Tesla proposal.”

Musk has hinted that he could issue as much as 15 million Tesla shares in order to raise money to buy SolarCity. Tesla investors can only hope that Musk is right and that the SolarCity merger doesn’t lead them to ruin in the end.

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Victor Alagbe is a seasoned business and finance writer with a specialty in writing about how to invest for the long-term in healthcare, pharmacology, energy and tech stocks. His long-term focus is on stocks that provide a nice mix of growth and income. For the short term, he passionately writes about trading stock options for the excitement and leverage that stock options offer.