Is Tesla's recently submitted offer to purchase SolarCity, valued at $2.8 billion, a grand plan to create an integrated energy company, or a last-ditch attempt to save an empire deeply in debt?
Two weeks ago, virtuoso entrepreneur Elon Musk surprised the business world yet again with Tesla’s bid to purchase SolarCity. Since Tesla is the world’s most successful electric vehicle company and SolarCity is the nation’s largest residential solar company, it should come as no surprise that the projected market cap for the combined company exceeds $1 trillion.
With both companies deeply in debt and highly dependent on taxpayer subsidies (over the past 8 years, nearly $20 billion has been deployed in alternative energy subsidies for technologies like electric cars and rooftop solar), some financial experts speculate that the proposed merger is a steely attempt to save a flailing empire.
But I’m not so sure—I’m inclined to believe that the offer is part of Musk’s grand plan and disruptive vision: to create the world’s first integrated energy company that controls the production, storage, monitoring, and streamlined usage of energy; to produce widely scalable, super-efficient batteries that can be used in cars and homes; and, in the process, fast-track the transition to a clean energy economy.
The merger of Tesla and SolarCity links energy supply (solar) with energy demand (vehicles); allows SolarCity to get around the pesky net metering and regulatory battles that it has been incessantly fighting for years with PUCs and utilities by offering a clear pathway to grid independence (solar + storage = self-sufficiency); and provides a unique and timely opportunity to destabilize grid economics.
The Battery Factor
Batteries are the key to the equation—they have historically been the bottleneck that has hindered the scalability and affordability of electric vehicles and has prohibited solar systems from being grid-independent. With a $5 billion investment in a lithium-ion “gigafactory” in Nevada, Tesla plans to solve the battery problem, essentially killing two birds with one stone, and, with the proposed SolarCity acquisition, effectively cornering the market in two astronomically growing categories.
As stated by Bloomberg, “if Tesla produces the cheapest lithium ion batteries available, and it begins to offer them standard with every rooftop solar system that Tesla Solar sells, it could suddenly find itself in control of a very large supply of flexible battery storage. The proceeds could be shared with customers directly or used to subsidize the upfront cost of rooftop solar installation.”
Tesla says that the integration of its electric vehicles and Powerwall batteries with SolarCity’s solar system technology, installation infrastructure, and financing capacity "would start with the car that you drive and the energy that you use to charge it, and would extend to how everything else in your home or business is powered.”
Translation: in the combined Tesla/SolarCity future, every home and building has the potential to become a mini-power plant, with solar panels, batteries, and electric vehicles producing and storing energy, either independent from the grid or connected to it as an aggregated “virtual power plant,” selling power back to the utility.
Mass and Mainstream
The electric vehicle, battery, and solar industries have all passed the “early-adopter” stage, with substantial technology advancements and cost decreases enabling the sectors to penetrate the mainstream. Musk’s plan, as described by the Financial Times, is to “find even a small edge in the mass technology of the day, scale up fast and ride the cost curve down towards world domination.”
Perhaps Tesla’s offer was hastened by the fact that the federal tax credit for electric cars and solar systems will be phased out over the next few years, which will substantially affect the economics of the sectors. It’s possible that Musk realized that, unless he makes a big move now to bring these technologies to the mass market (meaning, make them scalable and affordable), he might just lose everything.
Tesla investors were far from enthralled by the acquisition announcement (after all, they thought they were investing in a car company)—the company’s stock slid 7% in the first hours after the bid was made (in contrast to a 15% boost in the SolarCity stock price). But, as the initial shock has worn off and the logic of the deal has set in, investors seem to be warming up to the idea of a combined mobility, energy storage, and solar company, or what Musk claims to be “the world’s only vertically integrated energy company offering end-to-end clean energy products.”
Which brings us to the silver bullet question: does the make deal sense? No doubt, the two companies are already close partners and they target a similar customer demographic (studies show that consumers and businesses that invest in solar systems are also inclined to purchase electric vehicles.) And the storage component of solar systems is certainly on the rise (more so in the commercial space than in residential, as businesses want to take control of their energy production and pricing.)
Musk is confident that the marriage between Tesla’s innovative “showroom” approach (which can help personalize and streamline the process of purchasing solar) and SolarCity’s fleet of sales partners is a winning combination. Furthermore, Musk is convinced that SolarCity will be able to expand its manufacturing and engineering capabilities by merging with Tesla’s battery gigafactory (which, when fully up and running, will produce more battery capacity than the entire global market for lithium ion batteries made last year.) And the merger offers SolarCity a unique piece of the installation equation—electric vehicle charging stations—which will differentiate the company from its growing list of competitors.
Regardless of the litany of benefits, the deal is far from complete. Tesla’s debt burden exceeds $3.1 billion, and with the acquisition of SolarCity, that amount would increase to a staggering $5.8 billion—a number that won’t escape investors, not to mention the SEC. The decision to approve the deal is now up to two of SolarCity’s Board members, Donald Kendall and Nancy Pfund, both seasoned investors.
No Turning Back
Regardless of the outcome, Musk has just raised the stakes on the entire energy sector. Even if it doesn’t go through, just the threat of the deal changes the game for even the most well-financed incumbent automotive companies and fossil fuel energy companies. As former NRG Energy CEO David Crane said, “A competitive threat from a rising contender will prompt them to change their ways much more quickly and completely than the threat of government action or public protest ever would.”
Once again, Musk’s vision of a clean energy future is disrupting industries and facilitating the transition to a sustainable economy. Long live Elon Musk!
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