Why I’m voting yes on the Tesla-Solarcity Merger, and you should too.

One of the most controversial mergers of the year is about to go to a vote sometime soon (hopefully). Tesla and Solarcity, both brainchilden of Elon Musk, are attempting to create a one stop shop for renewable energy products from production to consumption.

Solarcity is the source of almost all the speculation surrounding the merger. Many analysts, journalist, and investors alike are concerned about the company’s liquidity and financial health. Solarcity has almost 2.8bn in long-term debt that and a dwindling supply of cash. While the company has continued to grow their revenues and maintain a decent gross margin, their operating expenses have outpaced revenues significantly. This has created a financial disaster and caused the stock to drop ~80% over the past few years and nearly reached IPO levels of 2012 (See chart below).

Solarcity’s troubles have largely been priced into the stock and investors are still feeling quite pessimistic surrounding the company’s future. In fact, Tesla offered to buy the company valued the company for $2.6bn and yet the current valuation lays around $1.77bn, a discount of roughly 30%.

While Solarcity brings financial burdens to Tesla, the two companies should be able to create quite a few synergies. Just in the first year, Tesla estimates they can create cost savings near $150m. Additionally, Tesla’s growing retail presence, 190+ stores, will be leveraged to offer Solarcity products as well.

I also believe that additional synergies can be achieved by cross selling to each of the companies existing customers. In the preliminary results of my Tesla owner/reservation holder/fan survey, over 50% believe that they will be customers of Tesla Energy and/or Solarcity in the next 2–3 years (includes current customers). I’m estimating that this could bring an additional $400–450m in synergies between the two companies over the next 2–3 years*.

Total Expected Synergies in year one: ~$285m

These synergies and Tesla’s future product line are enough to offset Solarcity’s financial issues for me, and I think are large enough to create a profitable business segment within Tesla.

Additional things to consider:

• Would you bet against Elon? :)
• Tesla can provide more cash for Solar for the short-term (See here)
• Elon and other board members are already involved with both companies, a merger could allow them to use their time more effectively and intrinsically create more value for shareholders.

How are you going to vote?

*Assuming that 40% of Tesla’s US owners purchase a Solar/Battery solution (30% of global customers= 52,000 US owners) from Tesla at an average ASP of $19–21k