Published on August 1st, 2016 | by Zachary Shahan0
Tesla Solar On Doorstep To Domination — Tesla’s $2.6 Billion SolarCity Acquisition & The Future
August 1st, 2016 by Zachary Shahan
Tesla’s move to acquire SolarCity has taken a big step forward. Below, I share the most recent facts of the Tesla–SolarCity merger (as presented by Tesla today), my thoughts on where this marriage will lead, and the overall background from which my thoughts arose. If you aren’t keen to know a little bit more about me, definitely feel free to skip the first section (no offense taken).
For transparency’s sake, I’ll drop a full disclosure right here: I’m a shareholder of both Tesla (TSLA) and SolarCity (SCTY), for reasons that I think will be obvious by the end of this article.
If you want some more background and discussion on Tesla’s acquisition of SolarCity, I recommend:
Confessions of a Solar Energy, Electric Vehicle, & Energy Storage Information Fiend
I’ve been in a unique position the past several years, one that I have cherished. I have obsessively covered the “cleantech industry” since mid-2009, and I’ve been director of CleanTechnica since mid-2010. The cleantech industry is broad, so I’ve had to decide which segments of the cleantech market I found most enticing, most promising, most helpful, and, overall, most worth covering. Solar energy, wind energy, electric vehicles, and energy storage were the segments of the market I (and others on the team) narrowed down on several years ago. Because these industries have grown so much, and our site has also grown so much (~10x over in terms of pageviews since I became site director, and from ~3–4 articles a day to ~15–20 articles a day), I’ve had to primarily pass wind energy off to others in order to maintain what I think is an acceptable understanding of how the solar, EV, and energy storage industries are evolving.
That doesn’t necessarily mean I’ve learned a lot about these industries and am someone whose opinion matters — I could be a fool who “learns” all the wrong lessons, comes to all the wrong conclusions, and is the last person you want to take advice from.
However, I do love to learn, am often focused on gaining a deeper and broader perspective on the topics I think about — let alone write and speak about — and would like to have as close to a complete picture as possible on my areas of expertise. As such, I have spent every day or almost every day of the past ~6 years gaining knowledge on these 4 industries and considering how each piece of information integrates with the others. (I don’t recall taking a full day off in that time period, but maybe I did once or a few times.)
That’s a long preface, but the point of it is this: I’ve thought quite bit about the things I’m about to write, and the overall conclusion is that there’s a large web of reasons why solar, electric vehicles, and energy storage are just better together, and especially why moving SolarCity underneath the Tesla umbrella is a wise move.
All of that said, I know plenty of you have been in these industries longer than me, many of you focus 100% on solar energy, many of you have much more “on-the-ground” (rather than “in-the-web”) experience than me, many of you have learned plenty of things I haven’t, and many of you have useful thoughts to share as well, so please do chime in!
Facts of the Tesla–SolarCity Merger As We Have Them
Let’s get some of the facts, as published by Tesla, out of the way:
- Tesla (of which Elon Musk is CEO) and SolarCity (of which Elon Musk is Chairman) have agreed to a deal in which Tesla acquires SolarCity for ~$2.6 billion worth of stock in order to buy out the company (note that the estimate is based on the average price of Tesla stock last week — “the 5-day volume-weighted average price of Tesla shares as of July 29, 2016”).
- Tesla and SolarCity have several of the same board members, so it was the “independent members” of the two boards who actually voted on (and approved) the acquisition. “Independent financial and legal advisors” assisted them in evaluating the offer. (“Tesla’s financial advisor was Evercore, and Wachtell, Lipton, Rosen & Katz was its legal advisor. The financial advisor to the special committee of SolarCity’s board of directors was Lazard and its legal advisor was Skadden, Arps, Slate, Meagher & Flom.”)
- “Under the agreement, SolarCity stockholders will receive 0.110 Tesla common shares per SolarCity share, valuing SolarCity common stock at $25.37 per share based on the 5-day volume weighted average price of Tesla shares as of July 29, 2016.”
- The broader shareholder populations of these two companies still must approve of the merger in order for it to be finalized — to be precise, that’s “a majority of the disinterested shareholders of both Tesla and SolarCity voting at each shareholder meeting.”
- With this acquisition, Tesla becomes the only company in the world that solely focuses on producing and selling solar energy products, producing and selling energy storage products, and producing and selling electric vehicles.
- Within the first full year after merging, Tesla & SolarCity expect to achieve “cost synergies of $150 million.”
- They also expect “to save customers money by lowering hardware costs, reducing installation costs, improving our manufacturing efficiency and reducing our customer acquisition costs.”
- Tesla has 190 retail outlets located in countries around the world, which can quickly start selling rooftop solar power systems.
- SolarCity does still have the chance to shop around (in other words, see if it can find a better husband before officially tying the knot). “As part of the agreement, SolarCity has a 45-day period known as a ‘go-shop’, which runs through September 14, 2016. This means that SolarCity is allowed to solicit alternative proposals during that time. Each company today filed a Form 8-K with the SEC that provides additional details regarding the transaction.”
Also note that, while other co-founders and investors were involved, Elon Musk did personally have the idea to create both Tesla Motors and SolarCity, and is the leading investor in both.
Now, Let’s Dream
As I just wrote last week when highlighting what I think is the genuinely monumental essence of the Tesla Gigafactory story, this Tesla–SolarCity merger isn’t simply about money and large numbers of machines — it is about dreams, a vision for the future, and reality-based information and foresight that stimulated those dreams and are beginning to validate the vision.
Elon Musk recently used the phrase “an accident of history” to explain why Tesla and SolarCity weren’t underneath the same company from the start. His thoughts in college — as he has expressed in dozens of interviews — were that sustainable energy and electric transport were two of the three (or five) most important factors for the evolution of society. If you look at the chart below, you can quickly get inspired by the potential of solar energy. If you look at the price trend of solar panels, the cost of solar panels today, the fact that solar (and wind) are already cheaper than fossil fuels in a large number of places, and solar price projections for the coming years, the inspiration flows over.
I could write about the cost trend of solar for hours, but I don’t think that would beat sharing a few charts, so have a quick look at the charts below and feel free to thank me for not making your eyes glaze over with paragraph after paragraph about $/kWh.
That last chart, from 2012, is quite out of date, and it’s hard to tell where solar ends up related to fossil fuels anyway, so here’s one more price chart, which shows the price of solar relative to the price of electricity from other energy sources:
Interestingly, that chart comes from Lazard (with modifications from me), which you may have noticed was, for this deal, the special financial advisor to the SolarCity board of directors.
The point of sharing all of these charts is to show that the solar industry is on the verge of demolishing the fossil energy industry. To think otherwise is to turn a blind eye to one of the clearest technological trends in the world.
SolarCity has dominated the US solar installation industry in the past few years. At 34%, it has almost 3 times the market share of #2 Vivint Solar and >11 times the market share of #3 Sunrun.
But hey, many an industry leader in a fast-growing market has fallen on its face and lost the race. Market share today is no guarantee of market share tomorrow. The critical matters of the deal are: 1) How does a merger with Tesla help SolarCity to keep growing, keep dominating, and keep getting better? 2) How does SolarCity help Tesla?
How Tesla can help SolarCity keep growing, keep dominating, and keep getting better:
- With 190 stores in countries around the world, Tesla can extremely efficiently bring solar energy sales to a gigantic number of new customers.
- With ~450,000 Tesla Model 3 reservations, it’s clear that Tesla is a highly coveted brand known for top-quality products, which will lead to many customers trusting Tesla for its solar energy needs as well as its automobile needs.
- Tesla is known to have a very low-pressure sales philosophy — if I recall correctly, Elon stated during the 2016 Tesla Shareholder Meeting that Tesla salespeople’s chief goal is to make the customers feel good. They are supposed to provide useful information to customers when asked, and make their availability to the customers obvious, but not put pressure on them in an annoying and sleazy way. SolarCity has a reputation for pushy and even deceiving door-to-door sales tactics, so transitioning the sales approach to Tesla stores and the Tesla philosophy could go a long way in improving the company’s reputation and eventual growth.
- Speaking of door-to-door sales (and basically combining points #1–3), if the SolarCity business can drop door-to-door sales, I think it can make significant headway in cutting “soft costs” (the majority of a solar power system’s prices in many places today). Whether that’s part of Elon’s plans or not, I don’t know, and I don’t actually know if it makes financial sense to fully drop door-to-door sales.
- Tesla has shifted from “just” trying to create awesome electric cars to trying to become the most efficient and best manufacturer in the world. Again, see my recent article on Gigafactory 1 and on the 2016 Shareholder Meeting for more on that, as well as this article. SolarCity’s biggest competitive advantage may not be its giant customer base and market share, but actually the Silevo solar panel technology and business it acquired. Nonetheless, to efficiently and reliably produce those solar panels requires a great deal of manufacturing expertise and innovation. Elon has already talked about putting Tesla engineers on the task, in collaboration with the SolarCity people already working on that, and I think we shouldn’t underestimate the potential from such collaboration.
- Humans love convenience and simplicity. If your electricity (from solar panels and maybe also battery storage) and your car(s) come from the same company, there are definite conveniences in terms of the shopping, operating, and payment experience. Elon has talked about integrating the solar, energy storage, and electric car products under one app, as just one example of that.
- This touches on point #1, but it’s worth highlighting in its own right: SolarCity is well known in the US solar energy industry (and among solar industry professionals globally), but I think it is hardly known at all in other countries around the world. Tesla, on the other hand, has quickly become a well known and popular global brand. The potential for SolarCity to make its way into other markets under the Tesla brand is … large.
How SolarCity can help Tesla:
- Naturally, SolarCity also has its own customers — a lot of them — and many of these solar homeowners aren’t electric car owners and may know very little about electric cars. All of a sudden, the company that sold them their solar panels is an electric car giant. This is quite different from a simple affiliate program. This will make many solar enthusiasts and happy SolarCity customers think a bit more about electric cars, and it surely opens many of them up to driving an electric car from the “same company” that sold them solar panels.
- SolarCity has its own financing, manufacturing, and organizational leaders who could bring valuable insight and innovation to other parts of the Tesla business.
- SolarCity, while it is “in debt,” has customers under contract to send it billions and billions of dollars in the coming decades. In my opinion, it is incorrectly characterized as a company in a poor financial position because of these long-term leasing & PPA contracts. Nonetheless, that is a key reason why Tesla could buy it at such a sweet price today. SolarCity is set to make money, a lot of money, but over the course of several years as customers pay it back for the solar panels SolarCity bought and placed on their roofs. In actuality, I think SolarCity has a very strong business case (one key reason I invested in it). Yes, SolarCity needs to move away from leasing & PPAs because that’s where the market is logically shifting, but the company seems keen on doing so and Tesla will make that easier through better financing, a better sales process, and better growth potential.
In the end, SolarCity & Tesla are just better together.