Two pillars of Elon Musk's empire are facing financial crunches
as the entrepreneur seeks to combine the two companies through a
controversial acquisition.
Tesla Motors Inc., which makes electric cars, disclosed in a
securities filing Wednesday that it has to pay $422 million to its
bondholders in the third quarter, and that it will raise additional
money by the end of the year. The purpose of the additional
capital, among other things, is to support its proposed merger with
home-solar company SolarCity Corp. Mr. Musk is the chairman of both
companies.
The filing also revealed that in recent weeks, 15 institutional
investors passed on either acquiring SolarCity or injecting equity
into it. The company is having difficulty tapping the public
markets amid the proposed merger and is facing a liquidity squeeze,
the filing indicated. SolarCity's cash declined to $146 million on
June 30, from $421 million a year earlier, the company has
reported.
Mr. Musk ignited controversy in June when he proposed combining
the two companies. Detractors characterized the proposal as a
bailout for SolarCity. Mr. Musk said the deal will save money and
create a more diverse company focused on batteries, solar energy,
automobiles and heavier vehicles.
In an interview Wednesday, Mr. Musk said that he had envisioned
Tesla's role in solar energy back in 2006 when he laid out his
initial plan for the auto maker. The combination of the companies,
he said, is intended to remove conflicts of interest created when
the separate entities do business with one another.
A Tesla spokeswoman said the merger was "the best way for Tesla
to bring an integrated clean energy product to market."
Last week, Mr. Musk and his cousins—SolarCity Chief Executive
Lyndon Rive and its technology chief, Peter Rive—disclosed they
would together buy more than 80% of a $124 million SolarCity bond
issue. The bonds will pay an annual interest rate of 6.5% and
mature in 18 months.
Mr. Musk said he bought half of the SolarCity bonds "as a show
of faith in the company."
Before the bond deal was announced, SolarCity's advisers had
asked Tesla to "consider providing SolarCity with short-term
financing" amid the pending merger deal, according to Wednesday's
filing. Mr. Musk said the bond sale was a better option.
"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," said Gordon Johnson, a managing director at
Axiom Capital Management Inc.
In its 10-year history, SolarCity has notched total revenue of
just $1.5 billion, while amassing $3 billion in debt. Because the
company's operating costs are high and its profit margins are thin,
it depends on issuing debt. SolarCity has a $250 million term loan
due Dec. 31, and $55 million in bonds coming due between Sept. 3
and the end of the year.
Tesla's debt-to-equity ratio was 145.5% as of June 30, and
SolarCity's was 375.6%, according to FactSet
Tesla said in Wednesday's filing it could issue up to 15 million
shares to pay SolarCity shareholders to acquire their company. The
filing said the stock-swap offer now values SolarCity at $24.16 a
share, or roughly $2.4 billion based on Tesla's closing stock price
June 21, before its offer was disclosed. Shareholders of both
companies are likely to vote on the proposed deal in October.
Tesla has been able to regularly tap various sources of capital
to sustain its operations. In the second quarter, it raised $1.7
billion from an equity offering, and its reserves also benefited
from hundreds of thousands of $1,000 refundable deposits for its
coming Model 3 vehicle.
Tesla's core business has burned more than $3 billion in cash
dating back to late 2014. It has issued equity or convertible debt
every year since its initial public offering in 2010.
In the Wednesday filing, Tesla said it would again tap debt or
equity markets by the end of 2016 to cover its costs of merging
with SolarCity, developing a cheaper electric car, producing
batteries and expanding retail operations.
The filing indicated that Tesla's board of directors began
seriously considering an acquisition of SolarCity following a board
meeting on May 31. Earlier, in February, Mr. Musk suggested to
Lyndon Rive, SolarCity's CEO, that they should consider a
combination. But the Tesla board, at a Feb. 29 meeting, rejected
the idea because of "the potential impact on Tesla management's
time and resources," the filing said.
On June 21, Tesla announced on its blog that it had made a
preliminary proposal to SolarCity. By the first week of July,
SolarCity's liquidity had deteriorated further, the filing showed.
At a July 6 meeting, representatives of SolarCity's outside counsel
and bankers discussed SolarCity's options and its "near-term
operational and liquidity position," the filing said.
At that meeting, the advisers also discussed another
development. "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," the filing said.
Between June 21 and SolarCity's ultimate acceptance of Tesla's
offer, SolarCity's advisers considered 15 potential suitors,
including one private-equity firm and several financial
counterparties, according to the filing. By July 21, all the
potential suitors except one had backed away, the filing said.
The next day, the final suitor dropped out as well because "it
did not believe that it was in a position to make an acquisition
proposal within the range of Tesla's original proposal," according
to the filing.
Cassandra Sweet contributed to this article.
(END) Dow Jones Newswires
August 31, 2016 20:35 ET (00:35 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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