Elon Musk sought to unite two businesses within his clean energy empire on Tuesday when his premium electric car company, Tesla Motors Inc, offered to buy the solar installation firm he co-founded, SolarCity Corp, in a $2.8 billion stock deal.
Tesla shares dropped 8 percent in Wednesday morning trading, even as Mr. Musk, who is the co-founder and CEO of Tesla, and a co-founder and chairman of SolarCity, told analysts he has "zero doubt" about the deal.
"The world does not look for another car company, the world looks for sustainable energy companies," Musk told reporters and analysts in a call on Tuesday, according to the Los Angeles Times. Acquiring SolarCity would allow Tesla to provide the solar panels, in addition to the electric vehicles and batteries, helping its customers lead a more sustainable lifestyle by using their own rooftops to charge their cars.
Shareholders at both Tesla and SolarCity will vote on the deal. If the immediate drop in share price is any indication, Tesla's shareholders will have to be convinced of the merits of transforming Tesla into a one-stop green energy solutions company.
"Ideally you want to see Tesla focus on Tesla – building Teslas and expanding the cars," Ivan Feinseth, an analyst at Tigress Financial Partners, told Reuters. "Maybe the feeling is that this takes away focus, and it could financially strain Tesla."
Tesla would take on about $2.8 billion worth of debt in the deal. Though SolarCity is the largest rooftop solar installer in America, the company has $6.24 billion in liabilities and has never made an annual profit since going public in 2012, according to Reuters. Analysts have raised concerns that SolarCity's business model – homeowners pay a monthly fee for solar panels rather than buying them outright – will no longer make financial sense due to changes in costs and tax incentives.
Tesla generated excitement with an announcement at the end of March that the company is expanding beyond high-end electric vehicles with the Model 3, a $35,000 electric mid-sized sedan with a 215-mile range supposed to begin initial production and deliveries at the end of 2017. Now, market analysts wonder if the expensive acquisition of SolarCity could dampen the prospects of Elon Musk achieving his aim of producing 500,000 vehicles by 2018.
"Tesla is adding a company that is increasing its cash burn right when Tesla will be trying to ramp its Model 3 production, which should also require a large amount of cash," Chuck Jones, an analyst who covers technology companies, wrote for Forbes.
Musk's companies are already closely tied together, and Tuesday's offer is the latest instance of Musk trying to boost the fortunes of one company by using another of his other companies. When SolarCity needed to raise money in 2014, it offered up bonds to investors, about half of which were bought up by Musk's private spaceflight firm, SpaceX.
Musk, the largest shareholder of both companies, won't be voting in the deal because of his conflict of interests, and SolarCity CEO Lyndon Rive, who is also Musk's cousin, is recusing himself from the decision-making process as well. Shareholders are expected to vote in the next few months.